<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 1999
Commission File Number 0-25186
AVT CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Washington 91-1190085
(State of incorporation) (I.R.S. Employer
Identification Number)
11410 NE 122nd Way
Kirkland, WA 98034
(Address of principal executive offices)
Registrant's telephone number, including area code: (425) 820-6000
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
--- ---
The number of outstanding shares of the Registrant's Common Stock as of
April 30, 1999 was 13,121,341.
<PAGE>
AVT CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
Table of Contents
Page
----
PART I. Financial Information
Item 1. Financial Statements (unaudited)........................ 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 8
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................... 11
Signatures................................................................ 12
2
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AVT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- ----------------
ASSETS (in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents $14,357 $10,824
Short-term investments 33,369 28,225
Accounts receivable, net 13,620 14,153
Inventories 5,565 5,560
Deferred and prepaid income taxes 2,109 1,430
Prepaid expenses and other 1,248 1,393
---------------- ----------------
Total current assets 70,268 61,585
Equipment and leasehold improvements, net 3,448 3,263
Intangibles, net 7,249 7,677
Deferred income taxes 3,518 3,582
---------------- ----------------
$84,483 $76,107
================ ================
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable $ 3,444 $ 3,669
Accrued compensation and benefits 4,061 3,768
Other accrued liabilities 5,160 4,901
Federal income taxes payable - 374
---------------- ----------------
Total current liabilities 12,665 12,712
---------------- ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share,
2,000,000 authorized; none outstanding - -
Common stock, par value $.01 per share,
60,000,000 authorized; 13,094,053 and 131 126
12,623,255 shares outstanding
Additional paid-in capital 45,473 40,368
Retained earnings 26,214 22,901
---------------- ----------------
Total shareholders' equity 71,818 63,395
---------------- ----------------
$84,483 $76,107
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AVT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
March 31,
------------------------------------
1999 1998
------------------------------------
(in thousands, except per share data)
<S> <C> <C>
Net sales $22,621 $17,166
Cost of sales 7,696 6,344
---------------- ---------------
Gross profit 14,925 10,822
Operating expenses:
Research and development 2,242 1,927
Sales, general and administrative 7,895 5,846
Non-recurring charges (1) - 287
---------------- ---------------
Total operating expenses 10,137 8,060
---------------- ---------------
Operating income 4,788 2,762
Other income, net 388 235
---------------- ---------------
Income before income taxes 5,176 2,997
Income tax expense 1,863 1,079
---------------- ---------------
Net income $ 3,313 $ 1,918
================ ===============
Basic earnings per common share $ 0.26 $ 0.16
Weighted average common shares outstanding 12,792 11,664
Diluted earnings per common share $ 0.24 $ 0.16
Weighted average common and common equivalent
shares outstanding 13,814 13,108
</TABLE>
(1) Non-recurring charges consist of write-off of costs related to the
withdrawal of the follow-on stock offering in February, 1998 (originally
filed in October 1997).
See accompanying notes to consolidated financial statements.
4
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AVT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
March 31,
-------------------------------------
1999 1998
------------------ -----------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,313 $ 1,918
------------------ -----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 792 676
Deferred income tax asset (205) -
Changes in current assets and liabilities,
net of effects of acquisition:
Accounts receivable 533 388
Inventories (5) 543
Prepaid expenses and other assets 145 144
Accounts payable (225) (74)
Accrued compensation and benefits 293 (562)
Other accrued liabilities 259 355
Federal income taxes payable 1,911 1,112
------------------ -----------------
Total adjustments 3,499 2,582
------------------ -----------------
Net cash provided by operating activities 6,812 4,500
------------------ -----------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (532) (438)
Purchase of short-term investments (5,144) (4,741)
Purchase of intangibles and other long-term assets (18) (29)
------------------ -----------------
Net cash used by investing activities (5,694) (5,208)
------------------ -----------------
Cash flows from financing activities:
Repayment of long-term debt - (155)
Proceeds from exercise of stock options 2,415 439
------------------ -----------------
Net cash provided by financing activities 2,415 284
------------------ -----------------
Net increase (decrease) in cash and cash
equivalents 3,533 (424)
Cash and cash equivalents at beginning of period 10,824 7,965
------------------ -----------------
Cash and cash equivalents at end of period $ 14,357 $ 7,541
================== =================
Supplementary disclosures of cash flows:
Cash paid for income taxes $ 158 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The accompanying consolidated financial statements of AVT Corporation and
subsidiaries (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three month period
ended March 31, 1999 are not necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this quarterly report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
2. Earnings Per Share
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------------------------------------------
1999 1998
--------------------------- ----------------------------
(in thousands, except per share data)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Diluted Basic Diluted
---------- ------------- ------------ -----------
Net income $ 3,313 $ 3,313 $ 1,918 $ 1,918
========== ============= ============ ===========
Computation of common and common
equivalent shares outstanding:
Common Stock 12,792 12,792 11,664 11,664
Options 1,022 1,444
---------- ------------- ------------ -----------
Common and common equivalent shares
used in computing per share amounts 12,792 13,814 11,664 13,108
========== ============= ============ ===========
Net income per share $ 0.26 $ 0.24 $ 0.16 $ 0.15
========== ============= ============ ===========
</TABLE>
3. Shareholders' Equity
On April 23, 1998, the Company announced that its Board of Directors
approved a two-for-one stock split of the Common Stock effected in the form of a
stock dividend. Shareholders received an additional share of common stock for
every share held on the record date of May 4, 1998. The additional shares were
payable on May 11, 1998. Accordingly, the accompanying financial statements have
been restated to reflect this stock split.
On April 20, 1998, the Company's Board of Directors approved an increase of
the authorized shares of Common Stock, from 30 million to 60 million and an
increase of the authorized shares of Preferred Stock from one million to two
million, in order to reflect the stock split. Shareholder approval of these
increases was not required.
4. Changes in Shareholders' Equity
<TABLE>
<S> <C>
Beginning balance at December 31, 1998 $63,395
Net Income 3,313
Exercise of stock options 2,415
Tax benefit from exercise of non-qualified stock
options 2,695
----------
Ending balance at March 31, 1999 $71,818
==========
</TABLE>
6
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AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Segment Reporting
The Company has adopted Statement of Accounting Standard No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS 131 requires companies to disclose certain information about
operating segments. Based on the criteria within SFAS No. 131, the Company has
determined that it has one reportable segment, computer telephony products.
Sales of the Company's product by categories and amount are as follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------------
March 31,
---------
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
Enhanced fax products............................... $13,002 $ 9,571
Advanced messaging and call center products......... 7,982 5,902
Basic messaging products............................ 1,637 1,693
------- -------
$22,621 $17,166
======= =======
</TABLE>
6. Acquisition of MediaTel
On April 14, 1999, the Company acquired MediaTel Corporation, a privately
held San Francisco based provider of outsourced electronic document delivery
services, in a transaction accounted for as a pooling of interests. The Company
issued 1,609,596 shares of common stock for all outstanding shares of MediaTel
and exchanged options to purchase 284,958 shares of the Company's common stock
at a weighted average price of $3.66 per share for the outstanding MediaTel
options.
Had the acquisition been consummated at March 31, 1999, the pro forma
results of the combined companies would have been as follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------------
March 31,
---------
1999 1998
-------- --------
(in thousands except
per share data)
<S> <C> <C>
Revenue............................................ $28,843 $22,313
Net income......................................... 3,942 2,405
Basic earnings per share........................... $ 0.27 $ 0.18
Diluted earnings per share......................... $ 0.25 $ 0.16
</TABLE>
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business operating costs and simplify access to data and dissemination of
information. The Company's products provide enhanced voice and data integration
through applications such as unified voice and data messaging, call center
management, IVR and document distribution. The Company's key products are multi-
application computer-telephony platforms that run on off-the-shelf hardware,
support Windows NT and OS/2, and interface with a wide variety of telephony and
computer equipment. The Company also offers add-on modules and software upgrades
that provide increased capacity and functionality.
The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales and OEM and private
label agreements. The Company's product lines serve the needs of two areas of
the computer telephony market the telephony oriented buyer and the data oriented
buyer of enterprise software and systems. The Company's telephony-oriented
products include: CallXpress for Windows NT and CallXpress3, the Company's
premier multi-application, high capacity computer-telephony product lines;
PhoneXpress, a full-featured voice messaging system for small to medium-sized
enterprises; AgentXpress for Windows NT, a high-performance Windows NT-based
automated call center (ACD) system for medium-sized call centers; the recently
released Automated Agent for Windows NT, an IVR capability for CallXpress for
Windows NT; and Enhanced Agent, a set of interfaces and applications designed to
extend the capabilities of AgentXpress. The Company's data-oriented products
include RightFAX and RightFAX Enterprise, the Company's LAN-based fax server
lines for Windows NT, and CommercePath's line of production document delivery
systems for Windows NT and Unix. At this time the Company's data-oriented
products are focused on the enterprise fax market.
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 the
1998 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.
Results of Operations
Net sales. Net sales increased 31.8% to $22,621,000 in the quarter ended
March 31, 1999, from $17,166,000 in the comparable 1998 quarter. This growth was
fueled by enhanced fax sales which increased 35.8% from the comparable prior-
year quarter and represented 57.5% of net sales, and unified messaging and
installed base upgrade sales in our computer telephony group which increased 35%
and represented 35% of total net sales. Sales of low margin basic messaging
product lines were flat when compared to the same quarter in 1998. The Company
expects sales of the lower-margin basic messaging products to continue to be
affected by price pressures from competitive offerings and decline as a
percentage of total sales in the future. International sales for the first
quarter of 1999 increased 62.3% compared to the first quarter of 1998, and
represented 23.7% of total net sales.
Gross profit. Gross profit as a percentage of net sales improved to 66.0% in
the quarter ended March 31, 1999, as compared to 63.0% in the comparable prior-
year quarter, due to the continued sales mix shift toward the higher margin
enhanced fax and NT-based CTG product lines.
8
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Research and development. Research and development expenses increased to
$2,242,000 in the quarter ended March 31, 1999 from $1,927,000 in the comparable
prior-year period, due primarily to increased personnel costs relating to
acceleration of certain development projects. As a percentage of sales,
research and development expenses for the current quarter declined to 10.0%
compared with 11.2% of net sales in the comparable prior-year quarter.
Sales, general and administrative. Sales, general and administrative
expenses increased to $7,895,000 in the quarter ended March 31, 1999 from
$5,846,000 in the comparable prior-year quarter, due primarily to increased
marketing and personnel-related costs of developing domestic and international
distribution for both the CTG and Enterprise Fax channels. Sales, general and
administrative costs for the current quarter represented 34.9% of net sales, an
increase from 34.1% in the comparable prior-year quarter.
Operating income. Operating income for the quarter ended March 31, 1999
increased to $4,788,000, or 21.2% of net sales, from $2,762,000, or 16.1% of net
sales, in the comparable prior-year quarter. In the first quarter of 1998, the
Company wrote off costs of $287,000 related to the withdrawal in February of the
follow-on stock offering originally filed in October 1997.
Other income, net. Net other income was $388,000 in the quarter ended March
31, 1999, as compared to $235,000 in the comparable prior-year quarter due to
increased interest income on investments.
Income tax expense. The effective tax rate for the quarter ended March 31,
1999 and 1998 was 36.0%, with income tax expense of $1,863,000 for the quarter
ended March 31, 1999 and $1,079,000 in the comparable prior-year quarter.
Net income. The Company recognized net income of $3,313,000 or $0.24 per
diluted common share for the quarter ended March 31, 1999, as compared to
$1,918,000 or $0.15 per diluted common share for the comparable prior-year
quarter.
Liquidity and Capital Resources
Cash provided by operating activities in the three months ended March 31,
1999 was $6.8 million due primarily to continuing profitable operations. The
average accounts receivable collection period remained favorable at 51 days.
Inventories remained constant at $5.6 million at March 31, 1999 and December 31,
1998.
The Company expects that its current cash, cash flow from operations, and
available bank line of credit will provide sufficient working capital for
operations for the foreseeable future.
Impact of the Year 2000 Issue
The "Year 2000 Issue" is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. Systems that do not properly recognize date sensitive information
when the year changes to 2000, or interact with systems or components that fail
to do so, could generate erroneous data or otherwise fail to function properly,
or at all. There is speculation that a significant amount of litigation will
arise out of Year 2000 compliance issues, and the Company is aware of a growing
number of lawsuits against other software vendors. Because of the unprecedented
nature of such litigation, it is uncertain whether or to what extent the Company
may be affected by it.
The Company has developed a plan to ensure its internal systems and products
are Year 2000 compliant, and to mitigate its risks in the event that its vendors
or other third-parties with whom it has material relationships are not Year 2000
compliant on a timely basis. The Company has potential exposure relating to the
Year 2000 issue in four areas: (1) the Company's internal software and hardware
systems, including non-information technology systems; (2) suppliers of
9
<PAGE>
hardware and software the Company resells as part of its products; (3)
internally developed software the Company sells; and (4) other third-parties
with whom the Company has material relationships. The following information
explains how the Company is addressing each of these potential risk areas:
1. With respect to internal software and hardware systems, the Company
reviewed all its material systems to determine which systems were not
Year 2000 compliant. The Company is currently in the process of
completing all necessary upgrades, modifications and conversions to its
programs and equipment to ensure they will continue to be effective in
the year 2000, and expects to complete this process not later than June
30, 1999. All of such upgrades have been or are being done as part of a
normal upgrade cycle and accordingly no additional costs are being
incurred as a result of Year 2000 issues. The Company expects that the
only expense it will incur to make its internal software and hardware
systems Year 2000 compliant is approximately $5,000 to update an alarm
system.
2. The Company has tested and will continue to test computer components,
including fax and voice cards and software it purchases from third
parties, for Year 2000 compliance. The Company has verified that all
such components and software currently in use are Year 2000 complaint.
The Company, however, has identified alternate sources for critical
components in the event that a supplier's business is disrupted by the
advent of the year 2000.
3. Since June 1998, all of the Company's products available for sale to
customers have been Year 2000 compliant. The Company has offered free
or reduced cost upgrades to certain purchasers of the Company's
products that were not Year 2000 compliant when sold. The cost of
developing and providing such upgrades was approximately $100,000. The
Company does not intend to offer upgrades for certain of its older
products.
4. The Company has implemented a process to contact third parties with
which it has material relationships, including its vendors,
distributors, banks, and transfer agent, to attempt to determine their
preparedness with respect to Year 2000 issues and to analyze the risks
to the Company in the event any such third parties experience
significant business interruptions as a result of Year 2000
noncompliance. At March 31, 1999, the Company had substantially
completed this review.
The Company believes that it is taking the necessary steps regarding Year
2000 compliance with respect to matters within its control to ensure that the
Year 2000 issue will not materially impact the Company. However, the Company may
be materially adversely affected if important distributors or customers of the
Company experience significant disruptions in their systems or business due to
the advent of the Year 2000. In addition, the costs of the Year 2000 project and
the date on which the Company plans to complete Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. There can be no
guarantee that these assumptions will prove to be correct and actual results
could differ materially from those expected. The Company intends to develop a
contingency plan to address unexpected Year 2000 issues by June 30, 1999.
10
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVT Corporation
(Registrant)
Date: May 12, 1999 By: /s/ Roger A. Fukai
-----------------------
Roger A. Fukai
Executive Vice President
Finance and Administration,
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and the
Consolidated Statements of Income for the Three Months Ended March 31, 1999
(Unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,357
<SECURITIES> 33,369
<RECEIVABLES> 14,417
<ALLOWANCES> 797
<INVENTORY> 5,565
<CURRENT-ASSETS> 70,268
<PP&E> 9,437
<DEPRECIATION> 5,989
<TOTAL-ASSETS> 84,483
<CURRENT-LIABILITIES> 12,665
<BONDS> 0
0
0
<COMMON> 131
<OTHER-SE> 45,473
<TOTAL-LIABILITY-AND-EQUITY> 84,483
<SALES> 22,621
<TOTAL-REVENUES> 22,621
<CGS> 7,696
<TOTAL-COSTS> 7,696
<OTHER-EXPENSES> 10,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,176
<INCOME-TAX> 1,863
<INCOME-CONTINUING> 3,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,313
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.24
</TABLE>
