UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1996
OR
TRANSITION 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
Applied Voice Technology, Inc.
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(Exact name of registrant as specified in its charter)
Washington 91-119008
(State or other jurisdiction of incorporation or (IRS employer
organization) identification no.)
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11410 N.E. 122nd Way
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Kirkland, WA. 98034
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(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: (206) 820-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 13, 1997 was $ 55,336,750 (based upon the
closing sale price of $ 14.13 per share on the Nasdaq National Market
on such date).
Number of shares of Common Stock outstanding as of March 13, 1997 was
5,644,324.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be held May 13, 1997 are incorporated by
reference in response to Part III, Items 10-13 (Directors and Executive
Officers of the Registrant).
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TABLE OF CONTENTS
PART I
Item 1. BUSINESS.............................................................1
Industry Background..........................................................1
Strategy.....................................................................2
Products.....................................................................3
Sales, Marketing and Product Support.........................................6
Product Development..........................................................8
Proprietary Rights...........................................................8
Competition..................................................................9
Manufacturing...............................................................10
Employees...................................................................10
Item 2. PROPERTIES..........................................................11
Item 3. LEGAL PROCEEDINGS...................................................11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.........................................................12
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA................................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................................33
PART III
Items 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............34
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................................35
-i-
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PART 1
Item 1. BUSINESS
Applied Voice Technology, Inc. (AVT or the Company) develops,
manufactures, markets and supports a broad line of open systems-based
computer-telephony software products and systems. Computer telephony (commonly
referred to as CTI, for computer telephony integration) is a rapidly growing
industry that unites two of the most essential business tools: the telephone and
the personal computer (PC). Applications range from basic to advanced and
complex. One basic CTI application automatically answers incoming telephone
calls, routes the call to the desired party, and allows the caller to leave a
voice message if the party the caller is trying to reach is unavailable. Unified
messaging is an example of an advanced CTI application that allows a person to
manage his or her voice, fax, and electronic mail (e-mail) messages all from a
common terminal of choice, either a telephone or a PC, and in a single session.
An extension of unified messaging allows PC users on a local area network (LAN)
to send, receive and store fax documents directly using a PC, eliminating the
need for a standalone fax machine. Another advanced CTI application
automatically identifies an inbound telephone caller, determines through a
predefined script why the caller is calling, and transfers the caller to a live
agent along with the caller's pertinent information (commonly referred to as a
"screen pop"), thereby providing more efficient and enhanced customer service.
The Company provides these kinds of CTI solutions.
Industry Background
The computer telephony industry has developed in response to market
needs to enhance individual and workgroup productivity, reduce business
operating costs, and improve customer service. Rapidly changing technology in PC
hardware and software has enabled the development of products to meet these
needs. Since the foundation of CTI is both the telephone and the PC, products
and services are being created by both traditional telephony-oriented as well as
computer-oriented developers. While it has been open systems-based since
inception, AVT's roots lie in the telephony-oriented segment of the industry
referred to as voice or call processing.
The first voice and call processing systems performed the basic
applications of call answering, routing, and messaging. The early systems were
based on proprietary hardware and software. Over the past two decades, rapid and
significant advances in PC hardware and software have allowed more flexible open
systems-based products that incorporate "off-the-shelf" components to achieve
performance levels of the older proprietary technologies at much lower costs.
Leveraging off the tools developed for open-systems computer technology,
developers have accelerated the development of new CTI applications. As a
result, open-system developers have been able to lower product development
costs, reduce the time to market of new products and extend the functionality of
these systems beyond traditional, basic call answering and voice mail. The
availability of advanced CTI features on low-cost, personal computer-based
systems has made open-systems call processing attractive to not only large,
well-capitalized organizations but also small, price-sensitive businesses.
Concurrent with the proliferation of open-systems call processing,
multiple forms of messaging, in addition to voice mail, have become pervasive in
the office environment. For example, as organizations have decentralized their
information systems from mainframes to personal computers, the use of various
forms of electronic messaging has grown significantly. The growth has been
fueled by the increasing number and size of local and wide area networks, as
well as public information networks such as the Internet. In addition, LAN-based
fax servers, which store, forward and broadcast faxes, are beginning to replace
standalone fax machines. Although these diverse forms of messaging also utilize
a common open-systems architecture, they have emerged as independent
technologies, generally requiring their own dedicated hardware and communication
protocols.
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With these advances in messaging technologies, office workers must
respond to a broad range of different message types, and must do so utilizing a
variety of platforms and software applications. As a result, workers often spend
substantial time managing, rather than using, information. To improve the
efficiency of managing information, many organizations are seeking ways to unify
access to disparate forms of messaging. This includes providing workers access
to their messages whether they are in the office or calling from a remote
location.
Unified messaging represents CTI's answer to this problem.
In today's increasingly fast moving and competitive business
environment, customer service has been employed as an effective business
strategy by many product and service suppliers. In addition, with the
proliferation of mail order and internet-based businesses, the call center has
become one of the primary direct-to-the-customer interfaces. Call centers are
now mission-critical operations. CTI provides technology to enhance call center
productivity and service. Call management performs intelligent queuing and
prioritizing of incoming calls. Agents can service callers more efficiently and
effectively than merely on a first-in, first-out basis. Automatic call
distribution (ACD) systems route calls intelligently to agents and assist in the
productive management of a call center. Individual agent productivity can be
measured, and incoming call load balanced with agent deployment.
People need access to information stored in databases on their
computers not only when they are in their office, but also when they are away.
The most common device available to people outside the office is the telephone.
Interactive voice response (IVR) provides both the telephone access to such
computer-stored information, and the applications required to manipulate and
process this data. Therefore, with IVR, you need not be in your office to
conduct business, and you can do it 24 hours a day, 7 days a week. The PC
connected to the internet is emerging as an alternative access tool to the
telephone. Internet-based information on demand and electronic commerce is just
beginning to emerge, and has similar customer service attributes as IVR, and
therefore, provides an opportunity to expand CTI even further.
As the gap between computer and telephone technology has narrowed, the
uses for CTI have increased significantly. In the past, the telephone world has
been very "function" oriented; the user purchases and installs a system to
perform a function that he or she wants to use. The computer world has been more
"application" oriented; the user purchases tools with which to build
applications to meet his or her needs. CTI's power and versatility is based on
the fact that it provides basic functions such as basic call answering, routing
and messaging, advanced functions such as unified messaging, and advanced
applications such as call management, automatic call distribution, and
interactive voice response. The open systems-based orientation of CTI also
allows further customization of both functions and applications by way of
developer-provided application programming interfaces (API's).
Strategy
The Company's mission is to develop cost-effective, easy-to-use
computer-telephony software products that operate on industry-standard personal
computer platforms, and market these products throughout the world. While its
roots were in basic voice and call processing, the Company's primary focus since
the early 1990's has been on advanced CTI functions and applications (referred
to as advanced CTI). CTI has emerged from the convergence of two dissimilar
technologies, the telephone and the computer. These dissimilar technologies have
also been marketed by different distribution channels, telephony-oriented
dealers and computer-oriented data resellers. The Company believes that the
convergence of the technologies and distribution channels is an evolutionary
process, and that while there ultimately will be one market and one distribution
channel, today there are two through which the Company can meet its customers
needs. Therefore, the Company has implemented a dual-pronged product and
distribution strategy:
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Develop CTI software products and focused marketing efforts for the
telephony-oriented distribution channel. The Company's roots lie in the
telephony-oriented world. Key milestones in the Company's development of its
products include one of the world's first PC-based voice mail systems in 1985,
its first true multi-application software platform in 1991, and its first
unified messaging application in 1993. The Company continues to develop and
enhance its telephony-oriented product lines CallXpress3, PhoneXpress and px100.
CallXpress3 is the Company's premier telephony-oriented CTI platform, and
includes a robust suite of advanced CTI applications. Future enhancements to
CallXpress3 will include computer-oriented functions and applications as well as
traditional telephony-oriented functions and applications. PhoneXpress and px100
are high performance messaging systems providing basic CTI functions. These
products are marketed primarily through the Company's worldwide
telephony-oriented distribution channel which consists of over 400 dealers and
strategic partners.
Develop CTI software products and focused marketing efforts for the
computer-oriented distribution channel. The Company implemented the second prong
of its strategy by acquiring Cracchiolo and Feder, Inc. (d/b/a RightFAX) in
January 1996. The RightFAX line of high performance, LAN-based fax servers is
the Company's premier computer-oriented CTI platform. Future enhancements to
RightFAX will include telephony-oriented functions and applications as well as
computer-oriented functions and applications. The RightFAX products are marketed
through the Company's worldwide computer-oriented distribution channel of over
600 value-added resellers and distributors.
In addition, the Company believes long-term success requires strategic
growth within the CTI arena. In January 1997, the Company acquired selected
assets and liabilities of Telcom Technologies, Inc. a developer of open
systems-based automatic call distribution (ACD) systems (see Item 7 - Management
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events). The first product resulting from this acquisition,
AgentXpressNT, is expected to be introduced in the second quarter 1997 and will
bring a high-performance automatic call distribution offering to the Company's
telephony-oriented advanced CTI application product family targeted at the call
center. The Company continues to evaluate complementary technologies and
distribution channels to further implement its strategic growth initiative.
Products
The Company's product lines follow its primary strategies and fall into
two categories, telephony-oriented and computer-oriented.
The Company currently develops and supports three telephony-oriented
product lines: CallXpress3, PhoneXpress and px100. CallXpress3, the Company's
premier, multi-application, high capacity CTI product, was introduced in early
1991. PhoneXpress, introduced in 1993, is positioned for the organization
requiring high performance call answering and routing and voice mail, but not
requiring the advanced application orientation or capacity that a CallXpress3
system provides. px100 is designed to address the basic voice mail and call
answering requirements of the growing small business and professional services
market. All three product lines are either sold as software kits to dealers who
obtain their own hardware, or sold fully integrated on Company-provided personal
computer hardware platforms.
Software kits consist of CallXpress3, PhoneXpress or px100 software,
documentation, a hardware security key, voice cards and fax cards. Fully
integrated CallXpress3, PhoneXpress, and px100 system platforms include all the
components supplied in the software kits, plus fully integrated and tested
personal computers, disk drive storage devices of various sizes and
configurations, modems, monitors and keyboards.
With the acquisition of selected assets and liabilities of Telcom
Technologies in January 1997, the Company has added its fourth
telephony-oriented product line, AgentXpressNT, an automatic call distribution
system targeted at small-to-medium sized call centers.
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The Company's premier computer-oriented product line, RightFAX, is a
high-performance, LAN-based fax server. The RightFAX server is targeted at
organizations with high volumes of outgoing or incoming fax traffic, many fax
users, or where incoming fax documents require very secure and confidential
management. The RightFAX server is sold as software only or as a software kit
including fax cards.
CallXpress3
CallXpress3 is the Company's premier, telephony-oriented
multi-application CTI product. Designed to support from 4 to 64 telephone ports,
and basic to advanced CTI applications such as unified messaging, call
management, and interactive voice response, CallXpress3 can serve the needs of
small to large enterprises. All CallXpress3 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 initial installation or as add-on upgrades. While it was developed
with a telephony orientation, the standard LAN-connection capability of
CallXpress3 and software-modular packaging makes it a true "bridge" product to
the computer-oriented world. When combined with the wide range of port and
storage options available, the Company believes that its CallXpress3 systems
offer users the flexibility to meet their varied and changing needs.
CallXpress3 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 do one of the
following: enter an extension number, enter a name to obtain an extension
number, wait on the line for a receptionist, or leave a voice mail message.
Subscribers may leave voice mail messages and review messages received before
sending them on or deleting them. The Audiotext feature of the Automated
Attendant/Voice Mail module acts as a "spoken bulletin board," providing
information to those who require it. A voice menu tells a caller what options
are available and the caller presses touch-tone keys to make a selection and
hear a prerecorded message.
Networking. With the Networking module, a company with multiple
locations can link its offices together, thereby allowing subscribers at each
location to send and receive voice messages from any other office in the
network. Both industry-standard Audio Messaging Industry Standard (AMIS) and
proprietary AVT networking protocols are supported by this module.
Unified Messaging Applications
Desktop Message Manager. Desktop Message Manager provides a visual
interface to the subscriber's unified mailbox for access to voice and fax
messages. The visual interface lets the subscriber know who sent a message, the
type of message, 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 personal computer as well as display fax messages on the computer
screen. Subscribers may voice annotate faxes and distribute them to other
subscribers on the system. The related Message Manager for Exchange Inbox module
provides a subscriber with a graphical interface to manage his or her
CallXpress3 unified mailbox from the Windows95 Exchange Inbox.
<PAGE>
E-Mail Access. E-Mail Access provides subscribers with access to their
electronic mail messages by telephone. The system provides a subscriber with the
option to hear his or her electronic mail text messages through text-to-speech
capabilities or convert them into faxes through text-to-fax capability. E-Mail
Access integrates with Lotus' cc:Mail, Microsoft Mail and Lotus Notes. Future
E-Mail Access releases will integrate with other popular LAN-based electronic
mail systems.
Fax Mail. The Fax Mail module provides store and forward capabilities
for fax documents identical to those provided for voice messages. With Fax Mail,
a subscriber can retrieve and print faxes from his or her mailbox 24 hours a
day, and have faxes automatically delivered to any fax machine.
Call Center Productivity Applications
Automated Agent. Automated Agent is an interactive voice response
module that is programmed to provide information to callers in response to their
particular inquiries. When configured with other CallXpress3 modules, Automated
Agent enables complete application solutions to be designed for specific
business functions, such as catalog ordering and college registration. Script
Manager provides an English-like programming interface to develop sophisticated,
customized scripts. 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 for intelligent,
real-time management of incoming calls as either a call center workgroup
management tool or individual productivity tool. Incoming calls are identified
by either CallerID (or other central office provided protocol) or Call Manager
prompts, a database search performed, and a window popped to the subscriber's PC
telling who is calling. The subscriber can then decide whether to take the call,
take a message, or redirect the call to someone else. Desktop Call Manager can
be an very cost-effective application for smaller, informal call centers where
an ACD cannot be cost-justified.
Faxtext. With the Faxtext module, callers have 24-hour access to
requested information such as product literature, specification sheets, rate
sheets, technical bulletins or any other type of information a company wants to
quickly and easily communicate via fax.
CallXpress3 Access. CallXpress3 Access provides client-server voice
management tools and an application programming interface into the CallXpress3
database. Independent software developers and value-added resellers can use
these tools to build voice-enabled, telephone-based applications.
PhoneXpress
PhoneXpress is designed to meet the requirements of small-to-medium
sized organizations 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 of the advanced
CTI applications of unified messaging and call center productivity. PhoneXpress
is designed to support from 2 to 16 ports and may be optionally configured with
faxtext and networking capability to provide a cost-effective branch voice
processing system for enterprise-wide networks. PhoneXpress is available as a
software kit or as a completely integrated PhoneXpress system.
px100
px100 is designed for the small business and professional services
market that requires basic voice mail and call answering. Designed for easy
installation on the most popular key telephone systems, px100 can provide up to
100 mailboxes and supports 2 or 4 ports.
<PAGE>
RightFAX
The RightFAX high performance, LAN-based fax server is designed for
businesses with high fax traffic, many fax users, or where secure and
confidential fax management is required. The RightFAX product consists of a
server (server software and 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
merely sends the information to be faxed to the server, where all of the
conversions to fax format and outbound calling and transmission are managed.
In the same paradigm as the Company's telephony-oriented products,
RightFAX users have a mailbox to receive incoming faxes. Incoming faxes 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 the user's 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 servers can be configured from 1 to 32 fax ports and run on
either the OS/2 or Windows NT operating systems. RightFAX servers are compatible
with all major network operating systems and are sold as either software
licenses or software kits (including fax cards).
Sales, Marketing and Product Support
While the Company's telephony-oriented and computer-oriented product
lines have emerged from different technological origins, the two product
categories are now taking on characteristics of the other, the
telephony-oriented product lines adding computer-oriented functions and
applications, and the computer-oriented product lines adding telephony-oriented
functions and applications. The same is true of the marketing and sales efforts
and strategies of these products. The telephony-oriented and computer-oriented
distribution channels have emerged from different origins, but are now taking on
characteristics of the other, in step with the convergence of the technologies.
The Company has built large telephony-oriented and computer-oriented
distribution channels in the United States and is aggressively developing its
international distribution. The sales concentration is very diverse, with no
customer representing 10% of 1996 sales.
Domestic Telephony-Oriented Distribution
The Company currently derives its U.S. telephony-oriented sales
revenues through an indirect channel of wholesale dealers and distributors
comprised of customer premise telephone equipment (CPE) dealers, voice
processing (VP) specialists, and private label/OEM strategic relationships. The
Company has entered into distribution agreements with over 400 domestic
telephony-oriented companies. This channel consists primarily of both large and
small regionally-focused organizations. The Company also distributes through
national telephone equipment dealers such as Norstan Communications Corporation
(Norstan) and private label/OEM organizations such as Dictaphone Corporation
(developer of dictation systems and other voice-related applications) and Mcorp
(developer of hospitality software for the hotel/motel industry). The Company
believes it has the largest telephony-oriented channel capable of marketing and
servicing advanced CTI application products. The Company will continue to
selectively recruit additional dealers and private label/OEM partners, focusing
on those capable of marketing and servicing advanced CTI application products.
<PAGE>
Dealers are required to attend initial 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 nonexclusive sales
territories, but these agreements generally do not restrict the dealer's ability
to carry competitive products.
Domestic Computer-Oriented Distribution
The Company derives most of its U.S. sales of computer-oriented
products from an indirect channel consisting of computer-oriented resellers that
provide value-added services, independent software vendors, and professional
services companies specializing in custom systems development. Most of these
computer-oriented resellers are small to medium sized organizations and
regionally focused.
In addition, the Company markets its computer-oriented products
directly to end-user customers through trade show participation and journal
advertisement.
The Company believes that as its computer-oriented products become more
application-oriented, the sales mix will continue to shift from direct end-user
sales to indirect sales through the computer-oriented resellers.
International Distribution
The international market for CTI products is not as developed as the
United States. The Company believes that over the next few years the market for
both telephony-oriented and computer-oriented CTI products will grow faster
internationally than in the U.S. To address this opportunity, the Company is
developing broad coverage of international markets through a variety of dealer,
distributor, and strategic relationships. 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 international sales will be made in local
currencies. See Note 1 of Notes to Consolidated Financial Statements for a
summary of the Company's export sales for the years ended December 31, 1996,
1995 and 1994.
To date, the majority of the Company's international sales have been
in English-speaking countries: Canada, Australia, New Zealand, the United
Kingdom and South Africa. The Company expects its accelerated distribution
development and product localization efforts of the past few years will result
in higher growth rate in non-English speaking countries than the
English-speaking. Product localization has become more important as the
Company's products take on more computer-oriented characteristics (such as
visual displays). The voice-related aspects of the Company's products have had
multi-lingual capabilities since the late 1980s. The Company is actively
recruiting new dealers and distributors in international markets.
Product Support
The Company's dealers and distributors are primarily responsible for
supporting end-users of the Company's products. The Company provides technical
support to its dealers and distributors, most of which is telephone assistance.
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 also provides limited warranties on certain
hardware components distributed in conjunction with its products, thereby
permitting factory returns of defective parts within certain specified time
periods following delivery.
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.
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Product Development
The Company maintains two product development centers,
telephony-oriented products in Kirkland, Washington and computer-oriented
products in Tucson, Arizona. While development efforts in the past have been
separate, the convergence of the technologies has allowed the Company to
collaborate and leverage development efforts between the two groups. The Company
expects these cross-development efforts to increase in the future.
Telephony-Oriented Products
The CallXpress3 core software technology provides the foundation for
the CallXpress3, PhoneXpress and px100 products. This use of existing technology
resources has allowed the Company to control research and development expenses
while addressing the needs of an expanding call processing and
computer-telephony market. The Company has four engineering teams working in its
primary product areas: Applications Engineering, responsible for the core
server-based software for CallXpress3, PhoneXpress and px100; Integrations
Engineering, responsible for phone system integrations and voice and fax card
integrations; Desktop Engineering, responsible for LAN-based applications; and
Advanced Development, responsible for specialty and next generation products and
features.
The Company has opened a development center in Pomona, California as a
result of the acquisition of assets of Telcom Technologies in January 1997. This
group will focus development efforts on call center applications such as
AgentXpressNT and other call center related products.
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 advanced CTI application products as well as basic voice and
call processing functions. Many of the new features and capabilities will be
"computer-oriented." The Company also expects to expend significant research and
development efforts in developing next generation technology.
Computer-Oriented Products
The bulk of the Company's RightFAX product development efforts are
focused on the NT-based product line, and include advanced capabilities such as
the Company's recently released web client which provides management of a
RightFAX mailbox over the internet from any web browser. Many of the new
features and capabilities will be "telephony-oriented."
Strategic Development
With the international markets expected to grow at a faster rate than
North America 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 system administrator and desktop 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.
While the Company expects such investment in research and development
will generate revenue in the next several years, technological development is
always subject to potential delays and there can be no assurance that any new
products or product enhancements developed by the Company will achieve market
acceptance.
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Proprietary Rights
AVT relies on a combination of copyright, trademark and trade secret
laws, nondisclosure and other contractual agreements and technical measures to
protect its proprietary rights. There can be no assurance that the Company's
efforts to protect its proprietary rights will be successful.
The Company has filed a patent application in the United States. While
AVT believes that the application relates to patentable devices and concepts,
there can be no assurance that a patent will issue, or that any patent issued
can be successfully defended. The Company believes that patents are of less
significance in its industry than factors such as innovation, technological
expertise and distribution strength.
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 determined a license of patent rights was
necessary, it has entered into a license agreement. Although there can be no
assurance, 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.
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, 1996, the Company had license agreements
with Octel Corporation, Syntellect Inc., Intelligent Environments, Inc. and
Microsoft Corporation (Microsoft).
Competition
The Company believes that the competitive pressures it faces in both
the telephony-oriented and computer-oriented CTI markets are likely to
intensify, especially in the markets for basic functionality such as voice and
call processing. 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. While competition in the advanced CTI application
marketplace will also intensify, the Company believes it is well positioned due
to its technological leadership and strong distribution channel.
The Company's principal competitors in the telephony-oriented market
are independent suppliers, including Octel Communications Corporation, Centigram
Communications Corporation (Centigram) and Active Voice Corporation (Active
Voice). PBX and key telephone systems manufacturers such as Lucent Technologies,
Northern Telecom, ROLM/Siemens, Executone, Panasonic and Toshiba also compete
with the Company by offering integrated voice messaging systems of their own
design or under various OEM agreements.
In the call center market the Company's principle competitors are
independent suppliers, including Aspect and Rockwell. PBX and key telephone
systems manufacturers such as Lucent Technologies, Northern Telecom,
ROLM/Siemens and Executone also compete with the Company by offering integrated
ACD systems of their own design or under various OEM agreements.
In the computer-oriented market, the Company's principal competitors
are Optus Software, Alcom, and Cheyenne Communications. Many of the Company's
competitors distribute their products through the same distribution channel as
the Company. The Company competes intensely for the loyalties and attention of
its dealers, which in many cases also carry products offered by one or more of
the Company's competitors in addition to the Company's products.
Recently, the Company has also began to face competition from very
large software companies such as Microsoft, Lotus Development Corporation
(Lotus) and Novell, Inc. (Novell), who did not traditionally compete with the
Company.
<PAGE>
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, where 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 or vendors of
certain critical hardware components such as personal computer 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 Corp, Natural Microsystems and Mitel. The Company
purchases facsimile cards from Brooktrout and Dialogic Corp.
Employees
As of December 31, 1996, the Company had 174 full-time employees,
including 29 in administration, 11 in manufacturing, 39 in engineering and
product development, and 95 in sales, marketing and technical support. Company
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.
<PAGE>
Item 2. PROPERTIES
The Company's headquarters and administrative, engineering,
manufacturing and marketing operations are located in approximately 43,000
square feet of leased space in Kirkland, Washington under a lease that expires
in January 1998. The Company's computer-oriented operations are primarily
located in approximately 14,000 square feet leased in Tucson, Arizona under a
lease that expires in October 1999.
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
The Company is not a party to any material pending legal proceeding.
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 1996.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference to
information contained in Note 7 of Notes to the Consolidated Financial
Statements: Quarterly Financial Data and Market Information (Unaudited).
<TABLE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
--------------------------------------------
(in thousands, except per share data)
--------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales $ 44,127 $ 31,284 $ 28,761 $ 21,253 $ 15,064
Operating income (1) 8,574 6,730 5,342 2,414 238
Net income (1) 6,074 5,334 4,238 2,482 103
Operating income as percentage of
net sales (1) 19.4% 21.5% 18.6% 11.4% 1.6%
Net income per common share (1) $ 1.04 $ 0.94 $ 1.00 $ 0.68 $ 0.03
BALANCE SHEET DATA
Cash, cash equivalents, and short-
term investments $ 27,697 $ 24,446 $ 22,685 $ 1,817 $ 128
Working capital 30,870 29,670 24,294 3,948 1,450
Total assets 46,127 36,932 28,944 7,639 5,340
Shareholders' equity 38,883 32,889 24,998 4,795 2,090
<FN>
(1) Exclusive of the $4,140,000 nonrecurring charge for write-off of purchased in-process research and
development associated with the acquisition of Cracchiolo & Feder, Inc. (d/b/a RightFAX) in January 1996.
</FN>
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Founded in 1982, the Company develops, manufactures, markets and
supports a broad line of open systems-based software products and systems for
the rapidly growing computer telephony integration (CTI) market. CTI encompasses
a wide range of products that allow two of the most essential business
instruments, telephones and personal computers (PCs), to work together. Some CTI
products let people access and control telephone functions through a PC; others
let people access and control computer functions through a telephone. The CTI
market has emerged from the convergence of these two powerful and useful tools,
each with a different technological origin and marketing orientation.
The Company has implemented a dual-pronged strategy to address the CTI
market: developing telephony-oriented products marketed through a
telephony-oriented distribution channel, and computer-oriented products marketed
through a computer-oriented channel. The telephony-oriented products are:
CallXpress3, the Company's premier, multi-application, high capacity CTI
product; PhoneXpress, a high-performance call answering and routing and voice
mail system; and px100, a basic voice mail and call answering system for the
small business market. The computer-oriented product line is RightFAX, the
Company's premier, high performance, LAN-based fax server. These products
address the needs of four segments of the CTI market: advanced CTI applications,
"CTI-ready" systems, basic messaging systems, and installed base add-ons and
service. Advanced CTI applications products include CallXpress3 systems sold
with at least one advanced CTI application module (in addition to voice
mail/automated attendant) and RightFAX servers. "CTI-ready" systems are
CallXpress3 systems sold initially with voice mail/automated attendant
capabilities only, but which can be easily upgraded to include advanced CTI
features. The basic messaging market is addressed by the PhoneXpress and px100
products. Sales of non-CTI capability-enhancing add-ons, capacity-increasing
upgrades, and service parts to the installed base represent the fourth market
segment. The Company's strategies are focused on addressing these market
segments, and results of operations are reported accordingly. The Company
acquired RightFAX in January 1996, accounting for the business combination as a
purchase.
<PAGE>
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 operations and the percentage increase or decrease
from the prior year:
<TABLE>
<CAPTION>
Increase (Decrease) From
Year Ended December 31, Prior Year
1996 1995 1994 `96 vs. `95 `95 vs. `94
------------ ----------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 41% 9%
Cost of sales........................ 38.3 42.7 43.1 26 8
------------ ----------- ------------
Gross profit...................... 61.7 57.3 56.9 52 9
Operating expenses:
Research and development.......... 9.4 8.7 9.3 52 2
Sales, general and administrative 32.9 27.1 29.0 72 1
Write-off of purchased, in-process
research and development........ 9.4 - - - -
------------ ----------- ------------
Total operating expenses........ 51.7 35.8 38.3 104 1
Operating income..................... 10.0 21.5 18.6 (34) 26
Other income, net.................... 2.1 3.6 1.0 (18) 280
------------ ----------- ------------
Income before income tax expense 12.1 25.1 19.6 (32) 39
Income tax expense................... 7.7 8.0 4.9 36 80
------------ ----------- ------------
Net income........................... 4.4% 17.1% 14.7% (64)% 26%
============ =========== ============
</TABLE>
Net Sales
The Company derives net sales primarily from initial sales of
fully-integrated systems, software kits, or software licenses to dealers and
distributors and the follow-on sales of capability-enhancing add-on software
modules and capacity-increasing upgrades. The sales mix among the four market
segments, as well as among product lines, and software kits and fully-integrated
systems, impacts both net sales and gross margin. The Company typically does not
have visibility into short-term changes in sales mix. Sales to dealers and
distributors are recognized when the products are shipped.
<PAGE>
Years ended December 31, 1996 and 1995. Net sales increased 41% from $31.3
million in 1995 to $44.1 million in 1996 due primarily to the growth in advanced
CTI application products. Advanced CTI application product sales increased 163%
and represented 49% of 1996 sales as compared to 26% of sales in 1995. In
addition to the inclusion of RightFAX sales for the first time, the Company
introduced major enhancements to both the CallXpress3 and RightFAX product lines
during 1996, which contributed to this significant growth. In 1996 a higher
percentage of CallXpress3 systems were sold with advanced CTI application
modules (as compared to with voice mail/auto attendant functions only) than in
1995. This resulted in "CTI-ready" sales declining from 22% of 1995 sales to 13%
of 1996 sales. The combined CallXpress3 and RightFAX product lines represented
62% of 1996 sales as compared to 48% in 1995. Basic messaging sales of
PhoneXpress and px100 were unchanged and represented 26% of sales in 1996, down
from 37% in 1995. This trend is consistent with the Company's strategic emphasis
on advanced CTI applications rather than on lower-margin basic messaging sales.
Add-on and service sales increased 11%, representing 12% of 1996 sales.
International sales increased 83% in 1996 over 1995 and represented 18% of
net sales due primarily to growth in Europe. The Company significantly increased
its efforts to develop distribution outside the United States in 1996 to gain a
foothold in the international CTI marketplace which is just now emerging.
Although there can be no assurance as to the rate of market acceptance of the
Company's products in international markets, the Company expects the expanded
efforts in 1996, as well as the recently initiated efforts in Germany, France
and the Middle East, will result in a higher rate of growth than in the United
States.
Years ended December 31, 1995 and 1994. Net sales increased 9% from $28.8
million in 1994 to $31.3 million in 1995. The net sales dollar growth rate was
somewhat dampened by price erosion in the basic messaging market and a change in
the Company's product mix towards software kits (as opposed to fully-integrated
systems which include the personal computer and computer components). In
response to price pressure at the lower end of the basic messaging market, the
Company introduced a fully integrated px100 system for distribution through its
partner Sprint/North Supply. International sales increased 15% in 1995 over 1994
and represented 14% of net sales, due primarily to growth in Europe.
Gross profit
Years ended December 31, 1996 and 1995. Gross profit as a percentage of
sales improved from 57.3% in 1995 to 61.7% in 1996 due to: (1) the continued
product mix shift towards software kits and software licenses as opposed to
fully integrated systems, and (2) growth in advanced CTI application products
which have a higher software content than basic messaging systems. The Company's
telephony-oriented products can be purchased as a fully integrated system or
software kit. The computer-oriented RightFAX product line is sold either as a
software kit or software license. Sales of advanced CTI application system units
carry a higher price and gross margin than basic messaging systems due to the
additional software modules purchased and tend to be a higher mix of software
kits and software licenses as compared to fully integrated systems. Gross profit
on basic messaging system sales in 1996 continued to be negatively impacted by
price erosion and a higher ratio of fully integrated systems as compared to
advanced CTI application systems. While the Company expects additional
competition to enter the advanced CTI application marketplace, the favorable mix
shift from basic messaging to advanced CTI applications, which carry
significantly higher margins, will help offset the effects of price erosion.
Years ended December 31, 1995 and 1994. Gross profit as a percentage of
sales improved from 56.9% in 1994 to 57.3% in 1995, due primarily to the
significant increase in software kit mix (versus fully-integrated systems) and
increased CallXpress3 advanced application sales. These favorable trends were
partially offset by two factors in the lower-end of the basic messaging market
- -- price erosion and the packaging requirements of the Sprint/North Supply
distribution agreement, which includes px100 software fully-integrated on a PC.
<PAGE>
Research and development
Years ended December 31, 1996 and 1995. Research and development expenses
increased 52% from $2.7 million in 1995 to $4.1 million in 1996, due to the
addition of software development and quality assurance personnel associated with
the computer-oriented RightFAX product line and the accelerated development of
CallXpress3 Release 4.0, several CallXpress3 advanced CTI modules, and other
advanced development projects. Accordingly, research and development expenses as
a percentage of sales increased from 8.7% in 1995 to 9.4% in 1996. The Company
expects to continue to increase research and development spending significantly
in 1997 to further capitalize on opportunities in CTI applications and
international localization. (See Item 1 - Business Product Development.)
In addition, the Company recognized a nonrecurring charge of $4.1
million in 1996 for the write-off of purchased, in-process research and
development associated with the acquisition of RightFAX in January 1996. The
remaining intangibles resulting from this acquisition are being amortized over
seven years.
Years ended December 31, 1995 and 1994. Research and development expenses
increased 2% to $2.7 million in 1995, due primarily to the addition of
engineering and quality assurance personnel needed to support the advanced CTI
application modules and LAN integrations. Excluding expenses recognized in 1994
that represented the remainder of unamortized purchased technology arising from
a 1989 acquisition, 1995 research and development expenses would have increased
7% over 1994.
Selling, general and administrative
Years ended December 31, 1996 and 1995. Selling, general and
administrative expenses increased 71% from $8.5 million in 1995 to $14.5 million
in 1996. The increase was due primarily to the Company's expanded distribution
efforts in the computer-oriented channel resulting from the acquisition of
RightFAX, as well as significant increases in the telephony-oriented worldwide
sales management organization and expanded marketing programs. Selling, general
and administrative costs accordingly increased from 27.1% of sales in 1995 to
32.9% of sales in 1996.
Years ended December 31, 1995 and 1994. Selling, general and
administrative expenses were essentially flat at $8.4 million in 1994 and $8.5
million in 1995. Lower 1995 incentive and bad debt accruals were offset by
increased international distribution development efforts and additional
regulatory, reporting and administrative requirements associated with being a
public company. Selling, general and administrative expenses as a percentage of
sales decreased from 29.0% in 1994 to 27.1% in 1995 as the Company was able to
utilize personnel additions and expenditures made in previous years.
Other income
Years ended December 31, 1996 and 1995. Other income decreased from
$1.1 million in 1995 to $0.9 million in 1996 because cash and investment
balances declined in early 1996 as a result of payments made related to the
acquisition of RightFAX. The Company's mix of tax-exempt investments as compared
with taxable investments was unchanged throughout 1996.
Years ended December 31, 1995 and 1994. Other income increased
significantly from $0.3 million in 1994 to $1.1 million in 1995 due primarily to
interest earned on cash resulting from the Company's December 1994 initial
public offering.
<PAGE>
Income tax expense
Years ended December 31, 1996 and 1995. The Company's effective tax
rate increased from 32.0% in 1995 to 36.0% in 1996 excluding the effect of the
nondeductible, nonrecurring charge for the write-off of purchased, in-process
research and development discussed above. The increase was due primarily to the
effect of U.S. state and foreign income and franchise taxes. The Company expects
the effective tax rate in 1997 to be approximately 36%.
Years ended December 31, 1995 and 1994. The Company's effective tax
rate increased from 24.8% in 1994 to 32.0% in 1995. The remaining valuation
allowance associated with research and experimentation credit carryforwards was
recognized as a tax benefit in 1994. In addition, a portion of cash investments
was reallocated from taxable to tax-exempt instruments in 1995, thereby reducing
interest income and the effective tax rate.
Net income and earnings per share
Years ended December 31, 1996 and 1995. Net income excluding the
nonrecurring charge increased 14% from $5.3 million in 1995 to $6.1 million in
1996. Earnings per share excluding the nonrecurring charge increased 11% from
$0.94 in 1995 to $1.04 in 1996. Including the nonrecurring charge, net income in
1996 was $1.9 million and earnings per share was $0.33.
Years ended December 31, 1995 and 1994. Net income increased 26% from
$4.2 million in 1994 to $5.3 million in 1995. Earnings per share declined from
$1.00 in 1994 to $0.94 in 1995 due to the higher average share count in 1995, a
result of the Company's December 1994 initial public offering.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased from
$24.4 million at December 31, 1995 to $27.7 million at December 31, 1996. Cash
flow generated from operating activities increased from $2.3 million in 1995 to
$8.2 million in 1996 due to improved receivables collections and profitable
operations.
In February 1995, the Company prepaid the remaining balance due under a
royalty agreement associated with a business combination consummated in 1989
(see Note 6 of the Notes to 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, including imputed interest at 8.75%. The related
intangible asset is being amortized on a straight-line basis over the average
remaining life of the patents, approximately 12 years.
In January 1996, the Company acquired Cracchiolo and Feder, Inc.
(d/b/a/ RightFAX) for $4.2 million in cash plus 163,000 shares of the Company's
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 purchased,
in-process research and development. The remaining intangible assets are being
amortized over seven years from date of acquisition. In addition, the Company
paid $1.4 million in cash and 95,000 shares of the Company's common stock in
1997, relating to the 1996 earn out and guaranteed value of the Company's common
stock. As a result of the earn out, the Company recorded an additional $2.0
million of goodwill at December 31, 1996. The former shareholders of RightFAX
will be further entitled to receive additional consideration worth $1.8 million
in a combination of cash and the Company's common stock over the next two years,
if certain revenue and profit margin goals are achieved by RightFAX.
<PAGE>
The Company amended a license agreement in July 1996, prepaying its
remaining royalty obligation by issuing a noninterest-bearing note in the amount
of $450,000 which was completely paid prior to December 31, 1996. The related
intangible asset is being amortized on a straight-line basis over the average
remaining lives of the patents, approximately seven years.
At December 31, 1996, 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 1997 and contains certain financial covenants and
restrictions as to various matters, all of which the Company is currently in
compliance with. Borrowings under the line of credit bear interest at the bank's
prime rate or its interbank offering rate plus 1.75%, at the Company's option.
The Company invested $0.9 million in equipment and leasehold
improvements in 1996 as compared to $0.7 million in 1995. Equipment purchases in
both years consisted primarily of computer hardware and software. The Company
expects to spend less than $2.0 million in 1997 on property, plant and
equipment.
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 at least the next year.
Subsequent Events
In January 1997, the Company acquired selected assets and liabilities
of Telcom Technologies, Inc., a developer of NT-based open-architecture
automatic call distribution (ACD) systems. The purchase price for the
acquisition was $3.5 million in cash, plus warrants to purchase 100,000 shares
of the Company's common stock exercisable at $13.36 per share, which may be
exercised at any time prior to January 3, 2002. The Company will account for the
business combination as a purchase and expects to recognize a nonrecurring
charge of $3.6 million in the first quarter 1997 representing the value of
purchased, in-process research and development acquired.
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 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.
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 product and distribution channel sales mix,
introduction of new products by the Company or its competitors, pricing
pressures and general economic conditions. 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 and/or mix of sales can
cause significant variations in quarterly results of operations. In addition,
while the Company's sales to date have been generally denominated in U.S.
dollars, the Company is now actively marketing its products in certain foreign
countries in local currencies. Gains and losses on the conversion of foreign
currencies to U.S. dollars arising from international operations may contribute
to fluctuations in the Company's operating results. The Company does not
currently engage in any foreign currency hedging transactions. Accordingly, the
Company's results of operations for any period are not necessarily indicative of
results for any future period.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------- --- -----------------
1996 1995
----------------- -----------------
ASSETS (in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,195 $ 12,249
Short-term investments 15,484 12,197
Accounts receivable, less allowance for
doubtful accounts of $606,000 and $483,000 6,106 4,755
Inventories 2,458 1,728
Deferred income taxes 1,056 891
Prepaid expenses and other 502 994
----------------- -----------------
Total current assets 37,801 32,814
Equipment and leasehold improvements, net 1,479 954
Intangibles, net 6,847 3,164
----------------- -----------------
$ 46,127 $ 36,932
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,033 $ 1,103
Other current liabilities 3,967 1,493
Note payable - current portion 586 537
Income taxes payable 345 11
----------------- -----------------
Total current liabilities 6,931 3,144
----------------- -----------------
Note payable 313 899
Commitments
Shareholders' equity:
Preferred stock, par value $.01 per share, 1,000,000
authorized; none outstanding -- --
Common stock, par value $.01 per share, 30,000,000
authorized; 5,425,713 and 5,144,040 shares outstanding 54 51
Additional paid-in capital 28,267 24,222
Retained earnings 10,562 8,650
Deferred compensation -- (34)
----------------- -----------------
Total shareholders' equity 38,883 32,889
----------------- -----------------
$ 46,127 $ 36,932
================= =================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------------- ------------------ ------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 44,127 $ 31,284 $ 28,761
Cost of sales 16,895 13,364 12,391
----------------- ------------------ ------------------
Gross profit 27,232 17,920 16,370
----------------- ------------------ ------------------
Operating expenses:
Research and development 4,149 2,732 2,671
Selling, general and administrative 14,509 8,458 8,357
Write-off of purchased, in-process
research and development 4,140 - -
----------------- ------------------- -------------------
Total operating expenses 22,798 11,190 11,028
----------------- ------------------ ------------------
Operating income 4,434 6,730 5,342
----------------- ------------------ ------------------
Other income:
Interest income 909 1,063 199
Other 10 53 95
----------------- ------------------ ------------------
Other income 919 1,116 294
----------------- ------------------ ------------------
Income before income tax expense 5,353 7,846 5,636
Income tax expense 3,419 2,512 1,398
----------------- ------------------ ------------------
Net income $ 1,934 $ 5,334 $ 4,238
================= ================== ==================
Net income per common share $ 0.33 $ 0.94 $ 1.00
Weighted average common
shares outstanding 5,837 5,697 4,242
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------- Additional Deferred Total
Common Stock paid-in compen- Retained shareholders'
Shares Amount capital sation earnings equity
------------ ---------- ------------- ------------ ------------ --------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,543,191 $ 35 $ 5,931 $ (227) $ (944) $ 4,795
Issuance of shares in public
offering, net of underwriting
discount and $497 of
offering expenses 1,350,000 14 15,811 -- -- 15,825
Exercise of stock options 10,401 -- 32 -- -- 32
Stock compensation expense -- -- -- 108 -- 108
Net income -- -- -- -- 4,238 4,238
------------ -------- -------- -------- --------- -----------
Balance at December 31, 1994 4,903,592 49 21,774 (119) 3,294 24,998
Unrealized gain on investments -- -- -- -- 22 22
Exercise of overallotment
option from initial
public offering 168,750 1 2,039 -- -- 2,040
Exercise of stock options 71,698 1 409 -- -- 410
Stock compensation expense -- -- -- 85 -- 85
Net income -- -- -- -- 5,334 5,334
------------ -------- -------- -------- --------- -----------
Balance at December 31, 1995 5,144,040 51 24,222 (34 8,650 32,889
Unrealized loss on investments -- -- -- -- (22) (22)
Stock compensation expense -- -- -- 34 -- 34
Exercise of stock options 118,374 1 617 -- -- 618
Stock issued in acquisition 163,299 2 3,428 -- -- 3,430
Net income -- -- -- -- 1,934 1,934
------------ -------- -------- -------- --------- -----------
Balance at December 31, 1996 5,425,713 $ 54 $ 28,267 $ -- $ 10,562 $ 38,883
============ ======== ======== ======== ========= ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------------- ----------------- ---------------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income $ 1,934 $ 5,334 $ 4,238
-------------- ----------------- -----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,395 809 427
Write-off of purchased, in-process research and
development 4,140 -- --
Stock compensation expense 34 85 108
Changes in current assets and liabilities:
Accounts receivable 5 (1,732) (19)
Inventories (551) (332) 70
Deferred income taxes (137) 2 (671)
Prepaid expenses and other assets (237) (539) 40
Accounts payable 241 60 134
Accrued compensation and benefits 514 (80) (342)
Income taxes payable 546 (859) 870
Other accrued liabilities 271 (460) 440
-------------- ----------------- -----------------
Total adjustments 6,221 (3,046) 1,057
-------------- ----------------- -----------------
Net cash provided by operating activities 8,155 2,288 5,295
-------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (930) (691) (432)
Cash paid in acquisition, net of cash acquired (3,318) -- --
Purchase of short-term investments (3,309) (12,175) --
Other intangibles and long-term assets -- (1,807) 148
-------------- ----------------- -----------------
Net cash used by investing activities (7,557) (14,673) (284)
-------------- ----------------- -----------------
Cash flows from financing activities:
Net proceeds from initial public offering -- -- 15,825
Net proceeds from overallotment exercise -- 2,040 --
Repayment of long-term debt (983) (289) --
Proceeds from sale of common stock 331 198 32
-------------- ----------------- -----------------
Net cash (used) provided by financing (652) 1,949 15,857
activities
-------------- ----------------- -----------------
Net (decrease) increase in cash (54) (10,436) 20,868
Cash and cash equivalents at beginning of year 12,249 22,685 1,817
============== ================= =================
Cash and cash equivalents at end of year $ 12,195 $ 12,249 $ 22,685
============== ================= =================
Cash paid for interest $ 129 $ 44 $ --
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Applied Voice Technology, Inc. (the Company), a Washington corporation,
develops, manufactures, markets and supports a broad line of open systems-based
computer-telephony and call processing software products and systems that
automate call answering and enable a user to manage multiple types of messages
from either a personal computer or a telephone. The consolidated financial
statements include the accounts of all subsidiaries, all of which are wholly
owned. 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 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). Inventory consists of the following:
December 31,
1996 1995
------------------------------------
(in thousands)
-----------------------------------
Raw materials and service parts $ 2,193 $ 1,477
Finished goods 265 251
$ 2,458 $ 1,728
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,
1996 1995
---------------------------------------
(in thousands)
---------------------------------------
Computers and other equipment $ 4,015 $ 3,016
Leasehold improvements 339 311
Furniture and fixtures 372 256
4,726 3,583
Less accumulated depreciation (3,247) (2,629)
Equipment and leasehold
improvements, net $ 1,479 $ 954
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies (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 5.6 to 12 years.
December 31,
1996 1995
---------------------------------------
(in thousands)
---------------------------------------
Goodwill on RightFAX acquisition $ 4,070 $ --
License agreements 4,068 3,622
-------------------- ----------------
8,138 3,622
Less accumulated amortization (1,291) (458)
-------------------- ----------------
Intangibles, net $ 6,847 $ 3,164
==================== ================
Other Current Liabilities
December 31,
1996 1995
------------------------------------
(in thousands)
------------------------------------
Accrued compensation and benefits $ 1,252 $ 644
Acquisition costs 1,408 --
Other 1,307 849
--------------------- --------------
Other current liabilities $ 3,967 $ 1,493
===================== ==============
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.
Revenue Recognition
Revenues from sales to dealers are recognized when the products are
shipped. When the Company has an installation obligation, revenues are
recognized when product installation is complete. Revenues from system-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.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies (continued)
Net Income per Share
Net income per share is determined based on the adjusted net income,
divided by the weighted average number of shares of common stock and
equivalents, using the treasury stock method. Net income used in the calculation
includes the addition of hypothetical interest on additional proceeds remaining
under the treasury stock method using an average rate of return that the Company
has received on its investments. Common stock equivalents include common stock
options as well as additional shares to be issued in connection with the
RightFAX earn out.
Concentration of Credit Risk; Export Sales
The Company achieves broad U.S. market coverage for its products
primarily through a nationwide network of independent telephone equipment
dealers, voice processing specialists and data-oriented resellers. For the year
ended December 31, 1996, no customer represented over 10% of total sales. The
Company's largest customer represented 12.1% and 12.4% of total sales for the
years ended December 31, 1995 and 1994, respectively. No other customer
represented more than 10% of sales in any year. 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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
(in thousands)
<S> <C> <C> <C>
Canada $ 2,660 $ 2,055 $ 2,135
Other 5,338 2,315 1,665
================== ================== =================
$ 7,998 $ 4,370 $ 3,800
================== ================== =================
</TABLE>
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,
research and experimentation credits and the reduction of valuation allowances
as the Company realized the benefits of net operating loss carryforwards.
The following is a reconciliation from the U.S. statutory rate to the
effective tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ----------------------- ---------------------
Amount % Amount % Amount %
---------- -------- ------------- -------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 1,820 34.0% $ 2,667 34.0% $ 1,916 34.0%
Research and
experimentation
credit (69) (1.3%) (45) (0.6%) (306) (5.4%)
Write-off of purchased,
in-process research and
development 1,408 26.3% -- -- -- --
Change in valuation
allowance -- -- -- -- (604) (10.7%)
Nontaxable interest income (217) (4.0%) (148) (1.9%) -- --
State taxes and other 477 8.9% 38 0.5% 392 6.9%
------------ --------- -------------- -------- ------------ --------
Income tax expense $ 3,419 63.9% $ 2,512 32.0% $ 1,398 24.8%
============ ========= ============== ======== ============ ========
</TABLE>
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Income Taxes (continued)
Deferred taxes result from temporary differences relating to bad debt
and obsolescence reserves, depreciation and amortization and other accruals that
are expensed for financial reporting, but are not currently deductible for
income tax purposes.
Income tax expense and cash paid for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Current $ 3,556 $ 2,510 $ 2,069
Deferred (137) 2 (671)
-------------------- -------------------- --------------------
Total income tax expense $ 3,419 $ 2,512 $ 1,398
==================== ==================== ====================
Cash paid for income taxes $ 3,010 $ 3,677 $ 1,199
==================== ==================== ====================
</TABLE>
Significant components of the Company's deferred tax asset as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 244 $ 172
Inventory 118 129
Depreciation and amortization 195 205
Accrued compensation and benefits 137 83
Other 362 302
-------------------- --------------------
Net deferred tax assets $ 1,056 $ 891
</TABLE>
3. Shareholders' Equity
The Company has stock option plans under which employees, directors,
officers and other agents may be granted options to purchase common stock. The
Company has reserved approximately 1,860,000 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 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 1995 and 1996 been determined using the fair value method
consistent with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), the Company's net income and earnings
per share would have been reduced to the following pro forma amounts:
1996 1995
------------------ ----------------
Net Income: As Reported $ 1,934,000 $ 5,334,000
Pro Forma 793,000 5,324,000
Primary EPS: As Reported $ 0.33 $ 0.94
Pro Forma $ 0.16 $ 0.94
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Shareholders' Equity (continued)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995: risk free
interest rates of 6.25%; expected lives of five years; expected volatility of
45%; and $0 dividends.
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
A summary of the status of the Company's stock option plans at December
31, 1996, 1995 and 1994, and the changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- -------------------------- -------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- ----------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year 738,284 $ 2.95 809,175 $ 2.74 821,729 $ 2.55
Granted 891,900 13.26 16,487 15.56 30,625 8.43
Exercised (118,374) 2.82 (71,699) 2.76 (10,401) 3.00
Canceled (61,445) 13.02 (15,679) 5.86 (32,778) 3.33
------------- ------------- -----------
Outstanding at year-end 1,450,365 8.87 738,284 2.95 809,175 2.74
------------- ------------- -----------
Exercisable at end of year 598,236 2.76 657,619 2.61 616,177 2.61
Weighted average fair value
of options granted $ 5.77 $ 7.50 --
</TABLE>
Options outstanding at December 31, 1996, have exercise prices
between $1.00 and $19.00, with a weighted average remaining contractual life
of 7.2 years.
4. Line of Credit
At December 31, 1996, the Company had a $4.0 million unsecured
revolving line of credit, none of which was used during the years ended December
31, 1996 and 1995. The Company's line of credit expires in May 1997 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 1.75%.
At December 31, 1996, the bank's prime rate was 8.25%, and its interbank
offering rate was 5.5%.
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 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, 1996,
consisted of municipal notes and bonds whose amortized cost approximates
estimated fair value. The average maturity for these investments is four months.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments
Leases
The Company leases its office space under noncancelable operating
leases. Rent expense under the noncancelable leases amounted to $654,000 in
1996, $520,000 in 1995 and $618,000 in 1994. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):
1997 $ 742
1998 250
1999 176
=====================
$ 1,168
=====================
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, $40,000 in 1995 and $43,000 in 1994.
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 1996 and 1995, and $331,000 in 1994.
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, with the first installment paid
upon the signing of the agreement. The Company accrues interest expense at an
imputed rate of 8.75%. 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 at an imputed rate of 8.5%. 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 1996, $533,000 in 1995 and $598,000 in 1994.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
7. Supplemental Information - Valuation and Qualifying Accounts
<CAPTION>
Balance at Charged to Charged to Balance at
Description beginning of costs and other (1) end of period
period expenses accounts Deductions
--------------------- ------------- ---------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
December 31, 1994 $ 436 227 -- 168 495
December 31, 1995 $ 495 77 -- 89 483
December 31, 1996 $ 483 248 -- 125 606
<FN>
(1) Amounts include write-offs of accounts receivable deemed uncollectible.
</FN>
</TABLE>
8. Acquisition of RightFAX
On January 2, 1996, the Company acquired Cracchiolo & Feder, Inc.
(d/b/a RightFAX), a privately held developer of fax server software for local
area networks, through a merger of RightFAX into a wholly owned subsidiary of
the Company. The purchase price for the acquisition paid at the closing was $4.2
million in cash plus 163,000 shares of the Company's common stock. In addition,
the Company paid consideration of $1.4 million in cash and 95,000 shares of the
Company's common stock in 1997, relating to the 1996 earn out and guaranteed
value of the Company's common stock. As a result of the earn out, the Company
recorded an additional $2.0 million of goodwill at December 31, 1996. The former
shareholders of RightFAX will be further entitled to receive additional
consideration worth $1.8 million in a combination of cash and the Company's
common stock over the next two years, if certain revenue and profit margin goals
are achieved by RightFAX.
The pro forma unaudited operating results of the Company in the above
transaction for the year ended December 31, 1995, assuming the acquisition had
been made as of January 1, 1995, are summarized below:
Pro Forma
Actual (unaudited)
-------------------- ------------------
(in thousands, except per share data)
Net sales $ 31,284 $ 37,405
Net income $ 5,334 $ 5,866
Net income per common share $ 0.94 $ 1.00
Weighted average
common shares outstanding 5,697 5,888
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, 1995, or future results of
operations of the consolidated entity.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Subsequent Events
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 (ACD) systems. The purchase price
for the acquisition was $3.5 million in cash, plus warrants to purchase 100,000
shares of the Company's common stock exercisable at $13.36 per share, which may
be exercised at any time prior to January 3, 2002. The Company will account for
the business combination as a purchase and expects to recognize a nonrecurring
charge of $3.6 million in the first quarter of 1997, representing the value of
the purchased, in-process research and development acquired.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
10. Quarterly Financial Data and Market Information (unaudited)
<CAPTION>
Quarter
-------------------------------------------------------------
1996 First Second Third Fourth
- ---------------------------------------------- ----------- --------------- ---------------- -------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net sales $ 9,556 $ 10,680 $ 11,221 $ 12,670
Gross profit 5,779 6,575 7,019 7,859
Operating (loss) income (2,604) 2,036 2,207 2,795
(Loss) income before income tax expense (2,431) 2,261 2,459 3,064
Net (loss) income (3,039) 1,440 1,573 1,960
Net (loss) income per common share (1) $ (.52) $ .24 $ .26 $ .33
Weighted average common shares
outstanding 5,793 6,033 6,106 5,904
Stock price range (2)
High $ 14.75 $ 15.63 $ 14.13 $ 15.19
Low $ 8.25 $ 9.00 $ 9.75 $ 10.25
1995
Net sales $ 7,277 $ 7,647 $ 7,959 $ 8,401
Gross profit 4,208 4,440 4,760 4,512
Operating income 1,553 1,644 1,914 1,619
Income before income tax expense 1,900 1,938 2,160 1,848
Net income 1,235 1,302 1,502 1,295
Net income per common share (1) $ .21 $ .23 $ .26 $ .23
Weighted average common shares outstanding
5,766 5,750 5,705 5,717
Stock price range (2)
High $ 23.25 $ 20.38 $ 16.50 $ 15.00
Low $ 15.50 $ 13.75 $ 12.25 $ 10.75
<FN>
(1) Net income per 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." The stock price range above reflects the range of
trading prices for each period subsequent to December 8, 1994, the effective
date of the Company's initial public offering, as reported by NASDAQ. As of
December 31, 1996, there were approximately 75 stockholders of record of the
Company's common stock. The Company has not paid any cash dividends on its
common stock.
</FN>
</TABLE>
<PAGE>
The Board of Directors and Shareholders of
Applied Voice Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Applied
Voice Technology, Inc. (a Washington corporation) and its subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 Applied Voice
Technology, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
January 24, 1997
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Items 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III (Items 10-13) is incorporated by
reference to information in the Company's definitive proxy statement which will
be filed pursuant to Regulation 14a within 120 days of December 31, 1996.
<PAGE>
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 to Financial Statements
o Consolidated Balance Sheets - December 31, 1996 and 1995
o Consolidated Statements of Income - Years ended December 31, 1996,
1995 and 1994 o Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1996,
1995 and 1994.
o Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
o Notes to Consolidated Financial Statements
o Report of Independent Public Accountants
2. Index to Financial Statement Schedules
o 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 Applied Voice
Technology, Inc. (A) (Exhibit 3.1)
3.2 Amended and Restated Bylaws of Applied Voice
Technology, Inc. (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 (A) (Exhibit 10.2)
+ 10.3 1986 Incentive Stock Option Plan (A) (Exhibit 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, Inc. and each of its directors and officers
(A) (Exhibit 10.6)
10.7 Registration Rights Agreement dated May 24, 1985 between
Gull Industries, Inc.
and Applied Voice Technology, Inc. (A) (Exhibit 10.7)
10.8 Loan Agreement and Promissory Note dated July 14, 1995
between U.S. Bank of Washington and Applied Voice
Technology, Inc. (D) (Exhibit 10.9)
10.9 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)
10.10 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)
# 10.11 Amended Patent License Agreement dated September 29, 1995
between Syntellect Technology Corp. and Applied Voice
Technology, Inc. (B) (Exhibit 10.1)
10.12 Master Software Manufacturing License Agreemented dated
June 11, 1992 between Intelligent Environments Inc. and
Applied Voice Technology, Inc. as amended (A)
(Exhibit 10.16)
10.13 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)
10.14 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.(D)(Exhibit
21.1)
23.1 Consent of Arthur Andersen
27.1 Financial Data Schedule
(A) Previously filed with, and incorporated herein by reference to,
designated exhibit 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.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.
B. Reports on Form 8-K
There have been no reports on Form 8-K filed with the Securities and
Exchange Commission on behalf of Applied Voice Technology, Inc. during the last
quarter of the fiscal year ended December 31, 1996.
<PAGE>
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 the undersigned, thereunto duly authorized, in the City of Kirkland,
State of Washington, on the 26th day of March, 1997.
APPLIED VOICE TECHNOLOGY, INC.
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 26th
day of March, 1997.
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
Roger A. Fukai (Principal Financial and Accounting Officer)
/s/ James S. Campbell Director
- ----------------------------------
James S. Campbell
/s/ Robert L. Lovely Director
- ----------------------------------
Robert L. Lovely
/s/ William L. True Director
- ----------------------------------
William L. True
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
Registration Statements, File Nos. 33-92438 and 333-85452.
ARTHUR ANDERSEN LLP
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Balance Sheets as of December 31, 1996 and the Consolidated
Statements of Income for the Year Ended December 31, 1996 and is qualified
in its entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,195
<SECURITIES> 15,484
<RECEIVABLES> 6,712
<ALLOWANCES> 606
<INVENTORY> 2,458
<CURRENT-ASSETS> 37,801
<PP&E> 1,479
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,127
<CURRENT-LIABILITIES> 6,931
<BONDS> 313
0
0
<COMMON> 54
<OTHER-SE> 38,829
<TOTAL-LIABILITY-AND-EQUITY> 46,127
<SALES> 44,127
<TOTAL-REVENUES> 44,127
<CGS> 16,895
<TOTAL-COSTS> 16,895
<OTHER-EXPENSES> 22,798
<LOSS-PROVISION> 248
<INTEREST-EXPENSE> 129
<INCOME-PRETAX> 5,353
<INCOME-TAX> 3,419
<INCOME-CONTINUING> 1,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,934
<EPS-PRIMARY> .033
<EPS-DILUTED> .033
</TABLE>
