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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to _______________
Commission file number: 0-25186
AVT Corporation
(Exact name of registrant as specified in its charter)
Washington 91-1190085
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
11410 N.E. 122nd Way
Kirkland, WA. 98034
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (425) 820-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:)
Common Stock, $.01 par value per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 20, 2000 was $404,536,020 (based upon the closing sale price of
$12.8125 per share on the Nasdaq National Market on such date).
Number of shares of Common Stock outstanding as of March 20, 2000 was
31,573,543.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held May 9, 2000 are incorporated by reference in response to
Part III, Items 10-13 (Directors and Executive Officers of the Registrant)
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TABLE OF CONTENTS
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PART I
Item 1. BUSINESS......................................................................................... 3
Industry Background.............................................................................. 3
The AVT Solution................................................................................. 3
Strategy......................................................................................... 4
Products......................................................................................... 5
Distribution..................................................................................... 10
Product Support.................................................................................. 11
Product Development.............................................................................. 11
Proprietary Rights............................................................................... 12
Competition...................................................................................... 12
Manufacturing.................................................................................... 13
Employees........................................................................................ 13
Item 2. PROPERTIES....................................................................................... 13
Item 3. LEGAL PROCEEDINGS................................................................................ 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 13
PART II
Item 5. MARKET FOR REGISTRATION'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.............................................................................. 14
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................. 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................ 15
RISK FACTORS..................................................................................... 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................... 31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................. 49
PART III
Item 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................. 50
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PART 1
Item 1. BUSINESS
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. The Company provides flexible, cost-
effective products that address the unified messaging, voice messaging, fax
server, production fax and document delivery markets, and distributes these
products primarily through independent distributors and value-added resellers.
The Company's products run on off-the-shelf hardware, support Windows NT (with
future support planned for Windows 2000), and interface with a wide variety of
telephony and computer equipment.
Industry Background
Businesses are increasingly using information technology to improve
customer service, increase employee productivity, decrease costs and more
efficiently disseminate information. As the amount of information exchanged
between organizations increases, and the diversity of the delivery formats and
combinations used by organizations to exchange this information becomes more
complex, there is a growing need for organizations to find new ways to manage
information in a more timely and cost-effective manner.
In response to the growth in overall message traffic, organizations are
increasingly using unified messaging and advanced fax and voice messaging
systems that allow employees to more effectively manage communications and allow
easy access by telephone to large amounts of information that resides on
computer databases.
The growth in data communications presents additional opportunities for
accessing and sending information. For example, organizations are utilizing
electronic document exchange system and services to store, forward and broadcast
their growing volume of e-document traffic in an efficient manner. Electronic
messaging over LANs, the Internet and corporate intranets has emerged as another
way to access data and disseminate information. This rapid increase in multiple
forms of voice and data communication has further accentuated the need for
organizations to optimize their information management capabilities and
integrate voice and data communications.
The AVT Solution
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business operating costs and simplify information access and dissemination. The
Company's products provide enhanced voice and data integration through
applications such as unified voice and data messaging, and document
distribution. The Company's products run on off-the-shelf server hardware,
support Windows NT, and interface with a wide variety of telephony and computer
equipment.
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Strategy
The Company's mission is to deliver business to business communication
solutions by providing cost-effective, innovative computer-telephony software
products that operate on industry-standard computer platforms, marketing those
products throughout the world. Key components of the Company's strategy include:
Provide Complete Software-based Computer-telephony Solutions. The Company
is focused on providing a comprehensive and affordable set of software-based
computer-telephony solutions designed to enhance productivity, improve customer
service, reduce business operating costs and simplify access to data and
dissemination of information. The Company's products provide enhanced voice and
data integration through applications such as unified voice and data messaging,
IVR and document distribution.
Focus on the Enterprise Market. The Company currently targets enterprises
with 100 to 2,000 employees, including divisions and subsidiaries of Fortune
1000 companies. The Company's strategy is to continue to invest in new product
and service development and marketing initiatives to gain market share and
further meet the computer-telephony needs of the medium-sized enterprise.
Leverage Telephony and Data Expertise. The Company has established a
knowledge base in the development of call processing, voice processing and call
switching applications, as well as LAN, Internet and corporate intranet software
applications and services. The Company believes that its expertise in these
areas enables it to efficiently bring to market innovative software products and
services that unify and exchange information between businesses. While the
Company's product lines all provide computer-telephony functionality, the
Company tailors its products to take advantage of the distinct telephony-
oriented and computer-oriented distribution channels. The Company intends to
leverage its expertise to continue to develop channel-specific products and to
introduce new products that further integrate its telephony and computer
capabilities.
Capitalize on Installed Base. The Company intends to capitalize on its
installed base by offering add-on modules, software upgrades and new products,
all of which provide increased capacity and functionality.
Utilize Capabilities of Multiple Distribution Channels. The Company targets
enterprises primarily through telephony-oriented distributors and computer-
oriented value-added resellers as well as strategic partners and a major
accounts sales force. The Company believes that some enterprises will evaluate
business to business solutions from a telephony perspective while others will
focus on data-centric solutions. The use of multiple distribution channels that
target many of the same potential customers increases the likelihood that the
Company's products and services will be sold to a particular customer. The
Company continues to broaden its distribution channels by expanding its direct
sales efforts and by continuing to enter into distribution agreements with
private label OEMs and other strategic partners.
Grow Through Strategic Acquisitions. The Company believes that growth
through strategic acquisitions of complementary technologies, products and
distribution channels offers the potential for significant competitive
advantage. The Company's open-systems technology facilitates the rapid
integration of and linkage to other complementary open-systems technologies. The
Company believes it is therefore able to accelerate introduction of new
technologies to the market through acquisition, and to respond rapidly to
industry changes and opportunities.
Pursue International Opportunities. The Company believes that the markets
for business to business communication solutions outside the United States will
experience accelerated growth in the next few years. To pursue these
opportunities, the Company intends to continue to localize its products for
specific markets and to actively recruit new dealers, distributors and strategic
partners internationally.
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Products
The Company's product lines include both telephony-oriented and computer-
oriented products, and outsource electronic document (e-document) delivery
services. The Company's telephony-oriented product lines serve the messaging
markets and focus on voice and call processing, unified messaging, IVR, and
personal and workgroup call management. The Company's computer-oriented product
lines target the fax server and production fax markets and focus on high-
performance fax processing and unified messaging, as well as Internet, corporate
intranet and phone-based information access. E-document delivery services target
the outsource mass fax and email markets for time-critical business-to-business
(B2B) communications. These services include high-volume, instantaneous IP fax
and email broadcast and merge offerings, fax reply and fax-on-demand
applications as well as industry-specific services and custom workflow solutions
for unique customer requirements. The following table provides an overview of
the Company's products in each of these markets.
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Product Line Description
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Messaging Products:
CallXpress Enterprise A multi-application unified messaging
platform for large, multi-site
enterprises that supports up to 128
ports and runs on Windows NT.
CallXpress A multi-application unified messaging
platform for small to medium-sized
organizations that supports 4 to 32
ports and runs on Windows NT.
PhoneXpress A call answering, routing and voice
messaging system for small to medium-
sized enterprises that supports 4 to 16
ports.
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Enhanced Fax Products:
RightFAX A high-performance LAN-based fax server
that runs on Windows NT and supports up
to 32 fax channels.
RightFAX Enterprise Server 7.0 A single source for electronic document
(Introduced 1999) exchange, converging network,
production, and IP fax under one
umbrella to provide customers highly
scalable and adaptable electronic
document (e-document) delivery.
RightFAX Production System A high-volume, production-oriented
server that enables fax and other forms
of electronic transmission for
electronic commerce applications,
supports up to 48 ports and transmits or
receives up to 2,800 pages per hour.
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E-Document Delivery Services:
DocumentBroadcast Fax & Email High-volume, simultaneous delivery of
fax and email documents to hundreds or
thousands. Broadcasts can be initiated
via the Web, from desktop software, a
fax machine or Assisted Services.
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DocumentMerge High-volume delivery, by fax or email,
of documents individually personalized
from database information.
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DocumentOnRequest Automated 24/7 access to frequently
requested documents via a toll-free
number.
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DocumentReply Fully automated receipt of high-volume
fax responses, integrated with outbound
document distribution.
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IndustryExpress Custom, high-volume document delivery
solutions for targeted vertical markets,
including mortgage, travel, publishing
and associations.
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MediaLinqClient software Client software for Microsoft Windows
giving users full access to AVT
MediaLinq Services from the desktop.
Gives customers the ability to launch
fax and email broadcasts, manage lists,
and track the status of broadcasts.
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WebLinq Anywhere access to AVT MediaLinq
services, providing the ability to
launch fax and email broadcasts, manage
lists and documents, and track broadcast
status from a standard Web browser.
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Messaging Products
CallXpress Line
The CallXpress family of products consists of CallXpress and CallXpress
Enterprise. The Company's premier unified messaging product offering,
CallXpress, was introduced in early 1997. CallXpress is designed to take
advantage of the advanced capabilities of the Windows NT operating system, and
provide easy-to-use installation and administrative capabilities and enhanced
fax functionality with RightFAX Enterprise. CallXpress is designed to support
from 4 to 32 ports and can serve the needs of small to medium-sized
organizations.
CallXpress Enterprise is a high-capacity, fault-tolerant unified messaging
system designed specifically for the large multi-site enterprise. CallXpress
Enterprise supports up to 128 ports on a single Windows NT Server - allowing
support for up to 10,000 users. CallXpress Enterprise comes complete with both
analog and digital networking, allowing communication between geographically
dispersed offices.
The Company's CallXpress messaging products are either sold as software kits to
dealers who obtain their own hardware, or sold fully integrated on Company-
provided PC hardware platforms. Software kits consist of software,
documentation, a hardware security key, voice cards and fax cards. Fully
integrated systems include all the components supplied in the software kits,
plus fully integrated and tested PCs, disk drive storage devices of various
sizes and configurations, modems, monitors and keyboards. While CallXpress was
developed with a telephony orientation, it is designed to link with computer-
oriented solutions through its standard LAN-connection and software-modular
packaging.
CallXpress application modules consist of software programs that operate in an
integrated, multi-tasking environment and are not dependent on secondary
hardware processors. Modules may be purchased either at the time of initial
installation or as subsequent add-ons. CallXpress software modules are divided
into three application categories: advanced messaging, unified messaging, and
call management.
Advanced Messaging Applications
Automated Attendant/Voice Mail. The Automated Attendant/Voice Mail module
answers calls on the first ring and invites the caller to enter an extension
number, wait on the line for a receptionist or leave a voice mail message. The
Audiotext feature of the Automated Attendant/Voice Mail module acts as a "spoken
bulletin board."
Digital Networking. With the Digital Networking module, a company with multiple
locations can link its offices together, thereby allowing subscribers at each
location to send and receive voice and fax messages to and from any other office
in the network using the Internet or corporate Intranet.
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Unified Messaging Applications
Desktop Message Manager. Desktop Message Manager provides a visual interface to
the subscriber's unified mailbox, letting the subscriber know who sent a
message, the type of message sent, when it arrived, whether it is urgent and its
length. The module will play back voice mail messages on the subscriber's
telephone or voice-enabled PC, as well as display fax messages on the computer
screen. A related module provides the subscriber with a visual interface to
manage his or her CallXpress unified mailbox from Microsoft Outlook/Exchange or
Lotus Notes/Domino.
E-Mail Access. E-Mail Access provides a subscriber with the option to hear
electronic mail text messages through text-to-speech capabilities or convert
them into faxes through text-to-fax capabilities. E-Mail Access integrates with
Lotus cc: Mail, Lotus Notes, Microsoft Mail and Microsoft Exchange.
Call Management Applications
Automated Agent. Automated Agent is an interactive voice response module that
enables complete application solutions to be designed for specific business
functions such as catalog ordering and college registration. Automated Agent can
be connected to the corporate database through a variety of host computer and
LAN-based interfaces.
Desktop Call Manager. Desktop Call Manager provides intelligent, real-time
management of incoming calls, allowing the subscriber or member of a workgroup
to take the call, take a message, or redirect the call. Incoming calls are
identified by Caller ID, prompting the system to display the caller's identity
on the subscriber's PC. Desktop Call Manager can be a very cost-effective
application for smaller, informal call centers where an ACD (automated call
distribution) system cannot be cost-justified.
PhoneXpress
PhoneXpress is designed to meet the requirements of small- to medium-sized
enterprises that require full-featured automated attendant and voice mail
functions. PhoneXpress is designed to support from 4 to 16 ports and can be
configured with networking capability to provide a cost-effective branch voice
processing system for enterprise-wide networks. PhoneXpress, like CallXpress
messaging products, is available as a software kit or as a completely integrated
system.
Enhanced Electronic Document Delivery Products
The RightFAX product line provides mid-size to Fortune 1000 organizations
advanced electronic document delivery solutions. The RightFAX product suite
converges network fax, production fax and IP fax under one umbrella to provide
customers highly scalable, reliable, and cost effective e-document delivery.
With the release of the RightFAX v7.0 product line in 1999, CommercePath
technology has been added to the product mix to provide customers with a high-
volume, low cost and unattended electronic delivery of mission critical
documents. In addition, RightFAX now also offers direct access to on-demand
document delivery through the AVT-MediaLinq advanced IP fax network.
Network Fax
Features such as Intelligent Least Cost Routing and load-balancing allow
organizations to leverage the Internet or Intranet to share resources with other
RightFAX servers.
Network administrators can centrally manage all RightFAX servers on the network
using the RightFAX Enterprise Fax Manager (EFM). With EFM, they can click a
button to view the status of every fax server; start and stop fax services
individually or globally; and configure least cost routing rules.
Production Fax
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RightFAX production systems, powered by CommercePath technology, provide high-
volume, delivery and receipt of business critical documents such as purchase
orders, invoices, and sales orders in a variety of formats including fax, email,
EDI or delivery over the Internet.
RightFAX production solutions save companies time and money while improving
accuracy and reliability by eliminating manual processes and the expense of
mailing documents. They also improve cash flow by drastically reducing the time
necessary to exchange invoices, statements and other electronic commerce
documents with customers, vendors and partners.
The RightFAX production environment tightly integrates with ERP applications
such as SAP, Oracle, Baan and Peoplesoft as well as products from other leading
technology partners such as Cardiff, GEAC and Jetform.
RightFAX production fax architecture allows an organization to distribute
services such as forms processing, notification, communication and inbound
routing across multiple servers. This scalability gives organizations the
ability to customize their server environment.
RightFAX also provides tracking and management of document delivery status
through a fax utility, FaxUtil. Users and administrators can also implement
the RightFAX Web Client, a browser-based interface that provides, real-time
document delivery confirmation information and the ability to interact with the
RightFAX system.
E-mail Integration
RightFAX products integrate with a variety of e-mail applications that allow
users to manage both e-mail and fax messages directly from their e-mail client.
This integration between RightFAX and e-mail packages like Microsoft Exchange
and Lotus Notes helps network administrators to manage users' fax and e-mail
mailboxes from one interface. Additionally, the integration between RightFAX
and various e-mail packages holds benefits for mobile workers. A reliable
alternative for managing document communications is required by many businesses
that have many users out of the office. RightFAX's e-mail integration allows
mobile users to manage their fax communications by checking their e-mail
accounts while out of the office.
Internet Delivery/IP Messaging
Businesses today have realized that faxing is an integral part of their network
communications strategy. With that realization, there is a need for a solution
that provides unlimited fax capacity for scheduled high-volume deliveries, fail-
safe support for unexpected occurrences such as fax board and phone line
failures and overflow fax service for unplanned projects. When these situations
occur, businesses need to maintain their ability to communicate via fax.
Outsource E-Document Delivery Services
DocumentBroadcast Fax and Email Delivery
MediaLinq's fax and email DocumentBroadcast services provide high-volume,
simultaneous distribution of business documents, allowing companies to
communicate with customers, prospects, members, vendors and employees. Users
establish a distribution list of their recipients and send their documents to
this list using MediaLinqClient desktop software, from a standard Web browser
using WebLinq, from a fax machine using the Direct Access interactive voice
response system (IVR), or by contacting MediaLinq's Assisted Services group.
DocumentBroadcast provides for automatic retries and resends of documents, and
routinely flags incorrect fax numbers or email addresses, which are then
compiled and delivered to the sender. All successful and unsuccessful deliveries
are tracked by broadcast delivery reports, sent to the customer via fax or email
upon completion of the broadcast.
Documents are distributed over MediaLinq's advanced IP-based network, which
delivers over one million business-critical documents each business day. With
over 6000 ports, this IP network supports high-speed, high-volume delivery with
full redundancy.
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DocumentMerge
DocumentMerge delivers large numbers of personalized documents by fax or email,
providing targeted communications for greater impact. Using a step-by-step Merge
Wizard in MediaLinqClient software, documents are customized with information
such as name, number, company, and region - any information contained in a
sender's database. Merge Tags automatically apply any font available in the
sender's document and allow for the insertion of dates and times and other
custom formatting.
DocumentReply
DocumentReply fully automates the receipt and collection of fax responses.
Combined with MediaLinq's outbound fax broadcast or merge services,
DocumentReply provides an end-to-end "send and reply" solution. Customers use
this service to distribute and collect documents that require a response, such
as survey and conference registration forms, removing the collection burden from
their on-premise fax system. A toll-free business-reply fax number is provided
for both document storage and for faxing responses. Responses are collected in a
secure mailbox attached to the number and are forwarded regularly to the
customer via email, fax, or postal mail.
DocumentOnRequest
Using DocumentOnRequest services, customers store frequently requested documents
on MediaLinq's server for automated retrieval via fax. Callers can access
documents 24 hours a day, seven days a week using dedicated toll-free numbers
for domestic callers or dedicated local numbers for international callers who
cannot access U.S. toll-free lines. Customizable voice prompts allow the caller
to select documents. A personal identification number (PIN) can be assigned for
confidential documents. In addition, MediaLinq allows customers to automatically
and simultaneously broadcast and store documents for retrieval in one step.
IndustryExpress Solutions
For specific vertical markets, MediaLinq has created targeted solutions to
simplify the e-document distribution process and to provide greater value for
industry-focused customers.
MortgageExpress is a service for mortgage bankers and lenders that
automates the complex rate sheet set up and distribution process using Windows
desktop software. Password-protected access provides selected access to regional
or custom-tailored pricing scenarios. In addition, the MortgageExpress customer
is supported by a mortgage-specific account and customer support team that
understands the needs of the mortgage industry.
TravelExpress is a specially designed database that allows targeted
marketing of promotions and travel industry news to selected travel agencies.
TravelExpress consists of over 35,000 U.S. listings that can be selected on over
50 different criteria to identify specific types of travel agencies, (e.g.,
destination specialty, annual sales volume, business or leisure focus). In
addition, the service includes over 60,000 international travel agencies
representing over 200 countries.
MediaLinqClient Software
Introduced in 1993, MediaLinqClient software gives customers desktop access to
the full range of MediaLinq services. Compatible with Microsoft(R) Windows 95,
98 and NT, MediaLinqClient provides fast, reliable Internet or modem connections
to launch fax and email broadcasts safely and securely. The software lets
customers import and manage broadcast lists, track the status of broadcasts, and
"live link" to external databases for automatic updates. Customers can also
schedule broadcasts for future delivery or to take advantage of off-peak
delivery rates.
WebLinq
Launched in 1999, WebLinq allows businesses to send fax and email broadcasts,
manage lists and documents and track broadcasts from any computing platform with
a standard Web browser. WebLinq requires no software installation or
maintenance. Secure Socket Layer (SSL) encryption ensures secure transactions.
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Distribution
The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales and OEM and private
label agreements. The Company believes that some enterprises will evaluate
computer-telephony solutions from a telephony perspective while others will be
more data-focused. The use of multiple distribution channels that access many of
the same potential customers increases the likelihood that the Company's
products will be sold to a particular customer. The Company has built large
telephony-oriented and computer-oriented distribution channels in the United
States and is developing its international distribution channels. No single
customer represented 10% or more of the Company's net sales during 1997, 1998 or
1999.
Telephony-Oriented Distribution
The Company currently derives a substantial percentage of its U.S. telephony-
oriented sales revenues from over 400 wholesale dealers and distributors
comprised of customer premise telephone equipment dealers and voice processing
specialists. This channel consists primarily of national telephone equipment
dealers and regionally focused organizations and is serviced by 21 employees.
The Company continues to selectively recruit additional dealers, focusing on
those capable of marketing and servicing advanced computer-telephony application
products.
Dealers are required to attend Company-sponsored training sessions on system
usage, installation, maintenance and customer support. Advanced training is also
available from the Company on an ongoing basis. All dealers are subject to
agreements with the Company covering matters such as payment terms, protection
of proprietary rights and nonexclusivity of sales territories, but these
agreements generally do not restrict the dealer's ability to carry competitive
products.
Computer-Oriented Distribution
In the United States, the Company's computer-oriented sales force sells most
of the Company's computer-oriented products through an indirect channel of
value-added resellers, independent software vendors, and professional services
companies specializing in custom systems development. These computer-oriented
resellers are small- to medium-sized regionally-focused organizations. In
addition, the Company markets its computer-oriented products directly to end-
user customers through trade shows and journal advertisements. As of December
31, 1999, the computer-oriented sales force consisted of 76 employees.
OEM/Strategic Accounts
To broaden its access to certain markets, the Company has entered into
distribution and private label/OEM strategic distribution agreements with
Ericsson, NEC and Fujitsu Business Communications Systems Inc. to sell private
label versions of the Company's CallXpress and PhoneXpress products. The Company
expects to pursue additional OEM and private label agreements in the future. As
of December 31, 1999 the Company had 11 employees focused on OEM and strategic
accounts. During 1999, the Company signed significant agreements with Symantec
and Xerox for co-marketing and sales of RightFAX products in conjunction with
Symantec's WinFAX PRO and with Xerox's Document Centre devices. In October,
1999, the Company signed a Global Strategic Alliance Agreement with IBM's Lotus
Development Corporation. The agreement includes joint product development,
channel development and the creation of training and education focused on
delivering NT-based, Domino/Notes-based unified messaging solutions.
International Distribution
The international market for computer-telephony products is not as developed
as the market in the United States. The Company believes that over the next few
years the market for both telephony-oriented and computer-oriented computer-
telephony products will grow faster internationally than in the United States.
To address this opportunity, the Company is developing broad coverage of
international markets through a variety of dealer, distributor, and strategic
relationships. To date, the majority of the Company's international sales have
been in English-speaking countries: Canada, Australia, the United Kingdom, South
Africa and New Zealand. The Company expects its accelerated distribution
development and product localization efforts of the past few years will result
in a higher growth rate in non-English-speaking countries than in English-
speaking countries. The Company is actively recruiting new dealers and
distributors in international markets. The Company has sales offices in the
United Kingdom, Germany, Hong Kong and Dubai. Although the Company's sales to
date have generally been denominated in U.S. dollars, the Company expects that
in the future an increasing portion of its international sales will be made in
local currencies.
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Product Support
The Company's dealers and distributors are primarily responsible for
supporting end-users of the Company's products. The Company provides telephone-
based technical support to its dealers and distributors. The Company also offers
technical training for both telephony-oriented and computer-oriented products to
its dealers. The majority of product support is provided by the Company within
three months of product shipment, and the estimated cost of such support is
recognized as product revenues are recorded. The Company generally charges its
customers separately for post-sale updates and upgrades.
Product Development
The Company has established a knowledge base in the development of call
processing, voice processing and call switching applications and services, as
well as in the development of LAN and Internet software applications and
services. The Company believes that its expertise in these areas enable it to
efficiently bring to market innovative software products that unify and exchange
information on and between the telephone and computer.
The Company maintains four product development centers: messaging products
are developed in Kirkland, Washington; enhanced electronic document delivery
products in Tucson, Arizona and Portland, Oregon; and e-document delivery
services in San Francisco, California. In total, the Company employed, as of
December 31, 1999, 132 engineers, technicians and quality assurance specialists
in its development centers. While development efforts in the past have been
separate, the convergence of technologies is allowing the Company to collaborate
and leverage development efforts among these groups. An example of such
collaborative efforts is the incorporation of the RightFAX fax server into the
CallXpress products and the utilization of the CommercePath technology in
RightFAX Enterprise 7.0, which was released in 1999. The Company expects these
cross-development efforts to increase in the future.
The Company internally develops its core technology, but believes that it is
more cost-effective to license from third parties certain components of its
products, such as database software, screen viewers, voice and fax cards and
network connectors. Whenever practical, the Company will license and integrate
such technology into its product offerings in order to decrease the cost of
development and shorten the time to market. In addition, the Company also
believes that the acquisition of new technology and new product offerings is
consistent with its strategic initiatives and will continue to pursue such
opportunities as they become available.
The Company believes that, for its product offerings to continue to achieve
acceptance, it will be necessary to continue to develop enhanced versions of its
computer-telephony applications. The Company expects to continue to expend
significant research and development efforts in developing new technology.
Additionally, with international markets expected to grow at a faster rate
than the North American market over the next several years, the Company intends
to continue to develop versions of its products that have been localized for
foreign markets. Localization includes converting client screens, documentation,
and voice-prompt sets into foreign languages. The Company anticipates expending
significant research and development resources to develop localized versions of
its products.
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<PAGE>
Proprietary Rights
AVT relies on a combination of patents, copyright, trademark and trade secret
laws, nondisclosure and other agreements and technical measures to protect its
proprietary technology. The Company has received a patent in the area of unified
messaging. There can be no assurance that the Company's efforts to protect its
proprietary rights will be successful. AVT has periodically received letters
from third parties asserting patent rights. Following analysis, the Company
generally has not believed it necessary to license any of the patent rights
referred to in such letters. In those cases in which the Company has determined
a license of patent rights was necessary, it has entered into a license
agreement. The Company believes that any necessary licenses or other rights
under patents to products or features could be obtained on conditions that would
not have a material adverse effect on its financial condition, although there
can be no assurance in this regard.
The Company licenses certain portions of its technology from third parties
under written agreements, some of which contain provisions for ongoing royalty
payments. As of December 31, 1999, the Company had license agreements with Octel
Corporation, Syntellect Inc., Intelligent Environments, Inc., International
Business Machines Corporation and Metasoft Systems, Inc.
Competition
The business to business communications market is highly competitive and the
Company believes that the competitive pressures it faces are likely to
intensify. System features, product pricing, ease of use and installation, sales
engineering and marketing support, and product reliability are the primary bases
of competition. The Company believes that it competes favorably with respect to
these factors in its target markets.
The Company's principal competitors in the telephony-oriented market for voice
messaging and unified messaging systems are independent suppliers, including the
Octel Messaging Division of Lucent Technologies, Inc., Active Voice Corporation,
and Callware Technologies, Inc. PBX and key telephone systems manufacturers such
as Lucent Technologies, Inc., Nortel Networks Corporation, Siemens Business
Communication Systems, Inc., Mitel Corporation and NEC America, Inc. also
compete with the Company by offering integrated voice messaging systems and
unified messaging systems of their own design or under various OEM agreements.
In the market for LAN-based facsimile systems, the Company's principal
competitors are Omtool, Ltd., Optus Software, Inc., Esker S.A. and Computer
Associates International, Inc. The Company's fax server products also compete
with vendors offering a range of alternative facsimile solutions, including
operating systems containing facsimile and document transmission features, low-
end fax modem products, desktop fax software, single-platform facsimile software
products and customized proprietary software solutions. In the market for
production facsimile systems, the Company's principal competitors are Biscom,
Inc., Esker S.A. and Topcall International AG. In the e-document delivery
services market the Company's principal competitors are the Xpedite division of
Premiere Technologies, AT&T, Cable and Wireless, and other telecommunications
companies who provide fax services.
12
<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, for which the Company has designed a proprietary
device to emulate a particular manufacturer's telephone station set. The Company
is dependent on third-party manufacturers and vendors for certain critical
hardware components such as PC chassis, keyboards, disk drives, monitors, memory
modules and other miscellaneous components.
The Company's products incorporate a number of commercially available
application cards, fax cards, voice cards and circuit boards that enable
integration with certain telephone switches. The Company currently purchases
voice cards from Dialogic and Mitel Corp. The Company purchases fax cards from
Brooktrout and Dialogic.
Employees
As of December 31, 1999, the Company had 450 full-time employees, including 60
in administration, 23 in manufacturing, 87 in engineering and product
development, and 280 in sales, marketing and technical support. The Company's
employees enter into agreements containing confidentiality restrictions. The
Company has never had a work stoppage and no employees are represented by a
labor organization. The Company considers its employee relations to be good.
Item 2. PROPERTIES
The Company's headquarters and its telephony-oriented administrative,
engineering, manufacturing and marketing operations are located in approximately
60,000 square feet of space in Kirkland, Washington under a lease that expires
in January 2003. The Company's computer-oriented operations are primarily
located in approximately 31,200 square feet of leased space in Tucson, Arizona,
approximately 19,500 square feet of leased space in Portland, Oregon and 15,300
square fee of leased space in San Francisco, California.
The Company believes that these facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available, as
needed, in the future on commercially reasonable terms.
Item 3. LEGAL PROCEEDINGS
In May 1998, CallWare brought suit against AVT in federal court in Salt Lake
City, Utah, alleging various claims relating to purported false advertising by
AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare had claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit was dismissed in November
1999 as a result of a settlement payment of $150,000 made by the Company's
insurers to avoid the expense of further litigation. AVT continued to assert
that the lawsuit was without merit.
On March 21, 2000, a class-action lawsuit was filed in the United States
District Court for the Western District of Washington alleging that during the
period January 20, 2000 through March 17, 2000, the Company and several officers
and directors made or participated in misrepresentations about the Company's
business and future prospects. Since the March 21 lawsuit was filed,
additional lawsuits have been filed that are identical to the March 21
lawsuit, with the exception of the name of the plaintiff. Each lawsuit seeks
unspecified damages on behalf of a proposed class of purchasers of the Company's
stock during the specified period. The Company believes that the allegations of
the lawsuits are without merit and intends to vigorously defend the actions.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
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PART II
Item 5. MARKET FOR REGISTRATION'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference to
information contained in Note 9 to the Consolidated Financial Statements:
Quarterly Financial Data and Market Information (unaudited).
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Net sales................................................. $40,950 $58,693 $ 76,971 $102,977 $130,224
Cost of sales............................................. 18,516 23,749 29,233 37,282 44,958
------- ------- ------- -------- --------
Gross profit.............................................. 22,434 34,944 47,738 65,695 85,266
------- ------- ------- -------- --------
Operating expenses:
Research and development................................ 3,054 5,280 7,988 9,474 10,311
Selling, general and administrative..................... 12,178 19,996 26,040 35,035 44,282
Non-recurring charges(1)................................ -- 4,140 11,025 287 3,255
------- ------- ------- -------- --------
Total operating expenses................................ 15,232 29,416 45,053 44,796 57,848
------- ------- ------- -------- --------
Operating income.......................................... 7,202 5,528 2,685 20,899 27,418
Other income, net......................................... 1,038 942 1,104 1,258 1,993
------- ------- ------- -------- --------
Income before income tax expense.......................... 8,240 6,470 3,789 22,157 29,411
Income tax expense........................................ 2,676 3,860 1,470 8,078 11,556
------- ------- ------- -------- --------
Net income................................................ $ 5,564 $ 2,610 $2,319 $ 14,079 $ 17,855
======= ======= ======= ======== ========
Diluted earnings per common share(2)...................... $ 0.48 $ 0.19 $ 0.16 $ 0.94 $ 1.12
Net income excluding nonrecurring items(3)................ $ 5,564 $ 6,750 $ 9,375 $ 14,262 $ 20,798
Diluted earnings per common share excluding nonrecurring
Items(2)(3).............................................. $ 0.48 $ 0.50 $ 0.65 $ 0.95 $ 1.31
Weighted average common and common equivalent shares
outstanding(2)........................................... 11,685 13,557 14,410 15,008 15,928
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $26,774 $30,208 $ 25,432 $ 42,691 $ 75,018
Working capital........................................... $31,815 $33,260 $ 31,743 $ 54,249 $ 86,225
Total assets.............................................. $42,929 $53,151 $ 62,686 $ 85,648 $121,709
Long-term debt, less current portion...................... $ 1,573 $ 830 $ 492 $ -- $ --
Total shareholders' equity................................ $35,960 $42,633 $ 48,371 $ 71,086 $102,205
</TABLE>
_________________________
(1) Reflects nonrecurring charges of $2,388,000 of merger-related costs incurred
in the merger with MediaTel in April 1999 and $867,000 of costs incurred
in the fourth quarter 1999 consolidation of our RightFAX and CommercePath
divisions into the new Document Exchange Software Group. The 1998 non-
recurring charges of $287,000 are related to the withdrawal of the follow-
on stock offering in February 1998 as well as $4,140,000, $3,898,000 and
$7,127,000 for the write-off of purchased, in-process research and
development associated with the acquisition of RightFAX in January
1996, Telcom Technologies in January 1997 and CommercePath in October
1997, respectively.
(2) Computed on the basis described in Note 1 to the Consolidated Financial
Statements.
(3) Excludes the after-tax effect of the nonrecurring charges in 1996, 1997,
1998 and 1999 referred to above.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business-operating costs and simplify access to data and dissemination of
information. The Company's products provide enhanced voice and data integration
through applications such as unified voice and data messaging, interactive voice
response (IVR) and document distribution. The Company's key products are multi-
application computer-telephony platforms that run on off-the-shelf hardware,
support Windows NT, and interface with a wide variety of telephony and computer
equipment. The Company also offers add-on modules and software upgrades that
provide increased capacity and functionality.
The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales, OEM and private
label agreements. The Company offers Windows NT-based products in each of its
main product categories. The Company's product lines serve the needs of two
areas of the computer telephony market - the telephony oriented buyer and the
data oriented buyer of enterprise software and systems. The Company's telephony-
oriented products include: CallXpress, the Company's premier multi-application,
high capacity computer-telephony product lines and PhoneXpress, a full-featured
voice messaging system for small to medium-sized enterprises. The Company's
data-oriented products include RightFAX and RightFAX Enterprise, the Company's
LAN-based fax server lines for Windows NT, and CommercePath's line of production
document delivery systems for Windows NT and Unix. The Company's e-document
delivery services offer high-volume, simultaneous delivery of fax and email
documents via the web, from desktop software or a fax machine.
Since January 1996, the Company has made three strategic acquisitions, which
were accounted for as purchases and one which was accounted for as a pooling of
interests. The Company acquired RightFAX, a developer of LAN-based fax server
software, in January 1996. In January 1997, the Company acquired selected assets
and liabilities of Telcom Technologies, a developer of NT-based open-
architecture ACD systems. In October 1997, the Company acquired CommercePath, a
developer of high-volume production-oriented fax servers. In April, 1999 the
Company merged with MediaTel Corporation, a provider of e-document delivery
services, in a transaction which was accounted for as a pooling of interests. In
connection with the RightFAX, Telcom Technologies and CommercePath acquisitions,
the Company recorded nonrecurring charges of $4.1 million, $3.9 million and $7.1
million, respectively, in January 1996, January 1997 and October 1997 for the
write-off of purchased, in-process research and development, and recorded
additional amounts of goodwill that are being amortized over future years. See
"-- Liquidity and Capital Resources" and Note 8 to the Consolidated Financial
Statements.
15
<PAGE>
On December 17, 1999, the Company announced that its Board of Directors
approved a two-for-one stock split of the Common Stock effected in the form of a
stock dividend. Shareholders received an additional share of common stock for
every share held on the record date of December 27, 1999. The additional shares
were payable on January 11, 2000. Accordingly, all share and earnings per share
amounts set forth in this report are shown on a pre-split basis and do not
reflect the two-for-one stock split.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items in the Company's consolidated statements
of income.
Year Ended December 31,
-----------------------
1997 1998 1999
------ ------ ------
Net sales................................... 100.0% 100.0% 100.0%
Cost of sales............................... 38.0 36.2 34.5
----- ----- -----
Gross profit................................ 62.0 63.8 65.5
Operating expenses:
Research and development............... 10.4 9.2 7.9
Selling, general and administrative.... 33.8 34.0 34.0
Non-recurring charges.................. 14.3 0.3 2.5
----- ----- -----
Total operating expenses............... 58.5 43.5 44.4
Operating income............................ 3.5 20.3 21.1
Other income, net........................... 1.4 1.2 1.5
----- ----- -----
Income before income tax expense............ 4.9 21.5 22.6
Income tax expense.......................... 1.9 7.8 8.9
----- ----- -----
Net income.................................. 3.0% 13.7% 13.7%
===== ===== =====
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<PAGE>
Net Sales
The Company derives net sales primarily from initial sales of software kits
and licenses and fully integrated systems, document delivery services as well as
follow-on sales of add-on software modules and product upgrades. Sales to
dealers and distributors are recognized when the products are shipped. The sales
mix among the Company's product categories and between software kits and fully
integrated systems affects both net sales and gross margin. Because of their
hardware components, fully integrated systems generate higher revenue per unit
and lower margins than comparable software kits. Advanced CTI application
systems generally are sold at a higher unit price and with a higher gross margin
than basic messaging systems due to the additional software modules purchased
and the higher mix of software kits and software licenses as compared to fully
integrated systems. Over the past three years, sales have shifted toward higher-
margin advanced CTI products and software kits from lower-margin CTI-ready
systems and basic messaging products. There can be no assurance that this
trend will continue.
Years ended December 31, 1999 and 1998. Net sales increased 26% to $130
million in 1999 from $103 million in 1998. This increase resulted from increased
sales across all product lines. Sales of exhanced fax products and services
increased 25% over 1998 and represented 64% of net sales. Sales of advanced
messaging increased 37% during 1999 and constituted 30% of total product sales.
Sales of the lower-margin basic messaging products were flat during 1999 and
represented 5% of net sales compared to 6% of net sales in 1998. International
sales for 1999 increased 45% from 1998, and represented 18% of net sales.
Years ended December 31, 1998 and 1997. Net sales increased 34% to $103
million in 1998 from $77 million in 1997. This increase resulted primarily from
increased sales of enhanced fax products and services, and a full year of sales
from our CommercePath business unit, which on a combined basis increased 59% in
1998, and represented 66% of net sales, as compared to 56% of net sales in 1997.
Sales of advanced messaging and call center systems continued to strengthen
during 1998 and constituted 27% of total product sales in 1998. The lower-margin
basic messaging market continued to be affected by price pressures from
competitive offerings. Basic messaging sales declined 33% in 1998 from 1997, and
represented 6% of net sales in 1998 compared to 12% of net sales in 1997.
International sales for 1998 increased 23% from 1997, and represented 15% of net
sales.
For the first quarter of 2000, we expect net sales to be significantly lower
compared to the first quarter of 1999. We believe our net sales are down for
this quarter primarily as a result of the continuing impact of the Year 2000
problem on both our channel partners and customers. We believe that IT
departments are either recovering from fatigue of implementing Year 2000
upgrades during 1999, or continuing to fight problems that have spilled over
into 2000. In either event, our sales partners have reported that many potential
AVT customers have delayed new purchase
17
<PAGE>
decisions until their schedules allow them to take on new products. As a result,
our channel partners have reported that their new sales pipelines were at
unusually low levels in January and February of 2000.
Gross Profit
Years ended December 31, 1999 and 1998. Gross profit as a percentage of net
sales increased to 65.5% in 1999, as compared to 63.8% in 1998, due primarily to
the continuing sales shift to the higher margin enterprise fax products and
advanced CTI applications.
Years ended December 31, 1998 and 1997. Gross profit as a percentage of net
sales increased to 63.8% in 1998, as compared to 62.0% in 1997, due primarily to
the favorable sales mix of enterprise fax products and advanced CTI applications
and the declining sales of basic messaging systems.
Research and Development
Years ended December 31, 1999 and 1998. Research and development expenses
increased 8.8% to $10.3 million in 1999 from $9.5 million in 1998, due to
increased personnel costs relating to continuing development projects. As a
percentage of net sales, research and development expenses represented 7.9% in
1999, as compared to 9.2% in 1998.
Years ended December 31, 1998 and 1997. Research and development expenses
increased 18.6% to $9.5 million in 1998 from $8.0 million in 1997, due primarily
to increased personnel costs relating to acceleration of certain development
projects, and a full year of research and development expenses associated with
CommercePath. As a percentage of net sales, research and development expenses
represented 9.2% in 1998, as compared to 10.4% in 1997.
Selling, General and Administrative
Years ended December 31, 1999 and 1998. Selling, general and administrative
expenses increased 26.4% to $44.0 million in 1999 from $35.0 million in 1998,
due primarily to increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels. Selling, general and administrative expenses for 1999 included
amortization of $1.3 million of goodwill relating to acquisitions compared to
$1.1 million in 1998. Selling, general and administrative expenses represented
34.0% of net sales in both 1999 and 1998.
18
<PAGE>
Years ended December 31, 1998 and 1997. Selling, general and administrative
expenses increased 34.5% to $35.0 million in 1998 from $26.0 million in 1997,
due primarily to the inclusion of CommercePath expenses for the entire year as
well as increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels. Selling, general and administrative expenses for 1998 included
amortization of $1.1 million of goodwill relating to acquisitions compared to
$0.7 million in 1997. Selling, general and administrative expenses represented
34.0% of net sales in 1998, as compared to 33.8% in 1997.
Non-recurring Charges
In the fourth quarter of 1999 the Company consolidated its RightFAX and
CommercePath divisions into the Document Exchange Software group. As a result
of this consolidation the Company incurred expenses of $867,000 during the
quarter of which $460,000 was a non-cash charge related to stock compensation.
On April 14, 1999 the Company merged with MediaTel Corporation in a tax-free,
stock for stock transaction valued at approximately $48 million. The
combination was accounted for as a pooling of interests and all amounts have
been adjusted to reflect this transaction. Related to this merger, the Company
incurred merger-related expenses of $2.4 million during the second quarter of
1999.
In February, 1998 the Company withdrew a follow-on stock offering
originally filed in October 1997 and wrote-off the costs of $287,000 in
connection with the canceled offering. In connection with the acquisitions of
Telcom Technologies and CommercePath, the Company recognized nonrecurring
charges of $3.9 million and $7.1 million in the first and fourth quarters of
1997, respectively, for the write-off of purchased, in-process research and
development.
19
<PAGE>
Other Income, Net
For the years ended December 31, 1997, 1998 and 1999, other income
increased from $1.1 million in 1997 to $1.3 million in 1998 and $2.0 million in
1999 due to increased interest income from increasing cash and investment
balances.
Income Tax Expense
The effective income tax rates excluding acquisition-related charges in
1999, 1998 and 1997 were 39.3%, 36.5% and 38.8% respectively. The acquisitions
of Telcom Technologies and CommercePath in 1997 were taxable transactions, and,
therefore, the resulting excess of purchase price over net tangible assets
acquired is deductible for income tax purposes. Primarily as a result of the tax
treatment of these acquisitions, the Company recognized an income tax expense of
$11.5 million in 1999, $8.1 million in 1998 and $1.5 million in 1997.
Net Income and Net Income Per Share
Net income was $17.9 million in 1999 as compared to $14.1 million in 1998.
Excluding the nonrecurring charges related to the merger with MediaTel in 1999
and the cancellation of the follow-on stock offering in 1998, net income would
have increased to $20.8 million compared to the 1998 net income excluding non-
recurring charges of $14.3 million. Diluted net income per share, excluding the
nonrecurring charges, increased to $1.31 per share in 1999 from $.95 per share
in 1998.
Years ended December 31, 1998 and 1997. The Company recognized net income
in 1998 of $14.1 million as compared to $2.3 million in 1997. Excluding the
nonrecurring charges related to the cancellation of the follow-on stock offering
in 1998, net income would have increased to $14.3 million compared to the 1997
net income excluding non-recurring charges of $9.4 million. Diluted net income
per share, excluding the nonrecurring charges, increased to $.95 per share in
1998 from $.65 per share in 1997.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased to $75.0
million at December 31, 1999 from $42.7 million at December 31, 1998 and from
$25.4 million at December 31, 1997, due primarily from operations. Cash flow
generated from operating activities was $29.1 million, $18.3 million and $12.1
million in the years ended December 31, 1999, 1998 and 1997, respectively. The
increases resulted primarily from increasingly profitable operations. Proceeds
from the sale of stock options also contributed $6.6 million.
20
<PAGE>
In January 1996, the Company acquired RightFAX for $4.2 million in cash
plus 326,000 shares of Common Stock. The business combination was accounted for
as a purchase. Approximately $4.1 million of the purchase price was recognized
as a nonrecurring charge in the first quarter of 1996, representing the value of
purchased, in-process research and development. The remaining intangible assets
are being amortized over seven years from the date of acquisition. As a result
of the earn out and guaranteed value of the stock issued in the acquisition of
RightFAX, the Company made payments in January 1999, 1998 and 1997 of $250,000,
$668,000 and $1,408,000, respectively, and also issued 9,800, 52,000 and 190,000
additional shares of common stock, respectively. This earn out resulted in
additional goodwill being recorded in December 1998, 1997 and 1996 of $0.5
million, $1.3 million and $2.0 million, respectively. No further earn out
amounts are payable.
In January 1997, the Company acquired selected assets and liabilities of
Telcom Technologies. The purchase price for the acquisition was $3.5 million in
cash, plus warrants to purchase 200,000 shares of Common Stock exercisable at
$6.68 per share, which may be exercised any time prior to January 3, 2002. The
Company accounted for the business combination as a purchase and recognized a
nonrecurring charge of $3.9 million in the first quarter of 1997, representing
the value of the purchased, in-process research and development.
In October 1997, the Company acquired all the outstanding capital stock of
CommercePath from Forest City Trading Group, Inc. for $10.4 million in cash.
The Company accounted for the acquisition as a purchase and recorded a
nonrecurring charge of $7.1 million for the write-off of purchased, in-process
research and development. In addition, the Company recorded $1.8 million of
goodwill that will be amortized over seven years. See Note 8 to the
Consolidated Financial Statements.
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 1,609,596 shares of the Company's common stock, 10% of which were
deposited into an escrow account to compensate the Company for certain losses
that it may incur as a result of breaches of representation and warranties and
other agreements by MediaTel. In addition, the Company assumed all outstanding
options to purchase MediaTel shares, which became exercisable for approximately
291,700 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 5,025
shares that were returned to the Company for losses, were distributed to the
former MediaTel shareholders.
The MediaTel transaction was accounted for as a pooling of interests. The
consolidated financial statements and the notes thereto have been prepared to
reflect the restatement of all periods presented to include the accounts of
MediaTel. The historical results of the pooled entities reflect each of their
actual operating cost structures and, as a result, do not necessarily reflect
the cost structure of the newly combined entity. The historical results do not
purport to be indicative of future results.
21
<PAGE>
At December 31, 1999, the Company had a $4.0 million unsecured revolving
line of credit, none of which was outstanding. The Company's line of credit
expires in August 2001, and contains certain financial covenants and
restrictions as to various matters. The Company is currently in compliance with
all such covenants and restrictions. Borrowings under the line of credit bear
interest at the bank's prime rate or its interbank offering rate plus 1.50%, at
the Company's option.
The Company invested $4.2 million, $3.5 million and $2.3 million in
equipment and leasehold improvements in the years ended December 31, 1999, 1998
and 1997, respectively. Equipment purchases in such years consisted primarily of
computer hardware and software.
The Company expects that its current cash, cash flow from operations and
available bank line of credit, will provide sufficient working capital for
operations for the foreseeable future.
Impact of Year 2000 Issues
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to distinguish
21/st/ century dates from 20/th/ century dates, the date code field needed to be
expanded to 4 digits. As a result, many companies' software and computer systems
were upgraded or replaced in order to comply with these Year 2000 requirements.
The use of software and computer systems that are not Year 2000 compliant could
result in system failures or miscalculations resulting in disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
Since January 1, 2000, the Company has not experienced any material
disruptions as a result of the failure of computer systems or software products
to be Year 2000 compliant. The Company believes it has taken the necessary
steps regarding Year 2000 compliance with respect to matters within its control
to ensure that the failure of computer or software products to be Year 2000
compliant will not materially impact the Company in the future.
With respect to internal software and hardware systems, the Company
reviewed all its material systems to determine which systems were not Year 2000
compliant. The Company completed all necessary upgrades, modifications and
conversions to its programs and equipment to ensure they would be effective in
the year 2000. All of such upgrades were done as part of a normal upgrade cycle
and accordingly no additional costs were incurred as a result of Year 2000
issues.
The Company has tested and will continue to test computer components,
including fax and voice cards and software it purchases from third parties, for
Year 2000 compliance. The Company has verified that all such components and
software currently in use are Year 2000 complaint. The Company, however, has
identified alternate sources for critical components in the event that a
supplier's business is disrupted by Year 2000 problems that have not yet been
identified.
All of the Company's products currently available for sale to customers are
Year 2000 compliant. The Company has offered free or reduced cost upgrades to
certain purchasers of the Company's products that were not Year 2000 compliant
when sold. To date, the Company has incurred costs of developing and providing
such upgrades of approximately $100,000. The Company does not intend to offer
upgrades for certain of its older products. The
22
<PAGE>
financial impact to the Company of the development and administration of its
upgrade programs has not been and is not anticipated to be material to its
financial position or results of operations in any given year. However, the
Company is dependent on its customers to take necessary steps, and if any
customers have not or do not make necessary modifications, conversions,
migrations, or upgrades, it could have a material adverse effect on the Company
in the form of legal costs or the loss of customers.
The Company contacted third parties with which it has material
relationships, including its vendors, distributors, banks, and transfer agent,
to attempt to determine their preparedness with respect to Year 2000 issues and
to analyze the risks to the Company in the event any such third parties
experience significant business interruptions as a result of Year 2000
noncompliance. The Company does not believe such third-parties have experienced
any materials disruptions as a result of Year 2000 compliance issues.
Notwithstanding the steps we have taken with respect to matters within our
control to ensure that our business would not be directly impacted in a material
way by the failure of computer systems and software products to be Year 2000
compliant, we believe that our sales for the first quarter of 2000 have been
indirectly affected by the Year 2000 issue. We believe that IT departments are
either recovering from fatigue of implementing Year 2000 upgrades during 1999,
or continuing to fight problems that have spilled over into 2000. In either
event, our sales partners have reported that many potential AVT customers have
delayed new purchase decisions until their schedules allow them to take on new
products. As a result, our channel partners have reported that their new sales
pipelines were at unusually low levels in January and February of 2000. We can
not be certain that this indirect impact of the Year 2000 problem will not
continue into future quarters.
The discussion of our efforts and ongoing expectations relating to year
2000 compliance include some forward-looking statements. Because the extent of
existing but undetected Year 2000 problems is unknown to us, we cannot be
certain that we will not incur additional, unanticipated costs, losses or
liabilities related to internal or third-party year 2000 problems. Such costs,
losses and liabilities could have a material adverse effect on our business,
financial condition and operating results.
Certain Trends and Uncertainties
When used in this discussion, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Factors which could
affect the Company's financial results are described below under "Risk Factors"
and in Item 1 (Business) of this report on Form 10-K. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
23
<PAGE>
RISK FACTORS
Our operating results fluctuate from quarter to quarter, which could cause our
operating results to fall below expectations of securities analysts and
investors.
We expect our operating results to fluctuate significantly from quarter to
quarter in the future. Because of these fluctuations, our operating results for
a particular quarter may fall below the expectations of securities analysts and
investors. If this occurs, the trading price of our stock may decline.
We believe period-to-period comparisons of our operating results are not
meaningful. Numerous factors contribute to the unpredictability of our operating
results, including
. the timing of customer orders;
. changes in our mix of products and distribution channels;
. the announcement or introduction of new products by us or our
competitors;
. pricing pressures; and
. general economic conditions.
The timing of customer orders can cause significant variations in quarterly
results of operations. Historically, we have operated with little or no backlog.
We earn almost all our revenues in each quarter from orders received in that
quarter. We base product development and other operating expenses on our
expected revenues. Because our expenses are relatively fixed in the short term,
we may be unable to adjust our spending in time to compensate for any unexpected
shortfall in quarterly revenues.
Changes in the mix of products we sell can also cause our operating results
to fluctuate from quarter to quarter. For example, shifts between fully
integrated systems and software kits result in fluctuations in gross margins
because fully integrated systems generate higher revenue per unit but have lower
margins due to their hardware component.
Our operating results may vary by season, which could cause our operating
results to fall below expectations of securities analysts and investors.
Our results of operations may fluctuate as a result of seasonal factors,
and this may cause our operating results to fall below expectations of
securities analysts and investors for a particular quarter. Specifically, due to
typical year-end dealer sales patterns and end-user buying patterns, net sales
in our first quarter, without taking into account the effect of acquisitions,
have in the past declined from the fourth quarter of the previous year.
We rely heavily on independent equipment dealers and value-added resellers.
24
<PAGE>
A substantial majority of our net sales depends on a network of independent
telephone equipment dealers and computer-oriented value-added resellers. There
is intense competition for the attention of these independent dealers and
resellers from our competitors and from providers of other products distributed
through these channels. Many of these dealers and resellers do not have the
financial resources to withstand a downturn in their businesses. We may not be
able to maintain or expand our network of dealers and resellers in the future.
Moreover, our dealers and resellers may not maintain or expand their present
level of efforts to sell our products. If we lose a major dealer or reseller, or
if our dealers and resellers lose interest in selling our products, our
business, results of operations and financial condition may suffer.
The integration of recent and any future acquisitions may be difficult and
disruptive.
We frequently evaluate potential acquisitions of products, technologies and
businesses. Since January 1997, we have made three strategic acquisitions. Our
recent and any future acquisitions may direct management's attention away from
the day-to-day operations of our business and may pose numerous other risks. For
instance, we may not be able to successfully integrate any technologies,
products, personnel or operations of companies that we may acquire.
In making acquisitions, we may need to make dilutive issuances of our
equity securities, incur debt, write off purchased, in-process research and
development and amortize expenses related to goodwill and other intangible
assets.
25
<PAGE>
Technology and customer needs change rapidly in our industry.
In our industry, technology and customer demands change rapidly, and we and
our competitors frequently introduce new products and features. To succeed, we
must identify, develop and market new products and features that satisfy those
changing customer needs and keep pace with those technological developments. To
do this, we must spend substantial funds on product development. We have already
devoted significant resources to technologies that we anticipate will be widely
adopted, such as Windows NT. However, we may not be able to develop new products
or product enhancements on a timely basis. Even if we do, the market may not
accept the new products or product enhancements that we develop.
Our market is highly competitive.
The computer-telephony market is highly competitive. Moreover, we believe
the competitive pressures we face are likely to intensify, particularly as our
competitors make new offerings based on the Windows NT operating system.
In the telephony-oriented market for messaging systems, our principal
competitors are independent suppliers such as the Octel Messaging Division of
Lucent Technologies, Inc., Mitel Corporation, Active Voice Corporation, Voysys
Corporation and Callware Technologies, Inc.
In addition to independent suppliers of computer-telephony solutions, we
also compete with private branch exchange and key telephone systems
manufacturers. Those manufacturers offer integrated voice messaging systems,
unified messaging systems and automatic call distribution systems of their own
design or under various OEM agreements. Competitors in this category include
Lucent Technologies, Inc., Nortel Networks Corporation, Siemens Business
Communication Systems, Inc., Mitel Corporation and NEC America, Inc.
In the market for LAN-based facsimile systems, our principal competitors
are Omtool, Ltd., Optus Software, Inc., Esker, S.A. and Computer Associates
International, Inc. Our fax server products also compete with vendors offering a
range of alternative facsimile solutions, including operating systems containing
facsimile and document transmission features, low-end fax modem products,
desktop fax software, single-platform facsimile software products and customized
proprietary software solutions. In the market for production facsimile systems,
our principal competitors are Biscom, Inc., Esker, S.A. and Topcall
International AG. In the market for document distribution products, our
principal competitors include the Xpedite division Premiere Technologies, Inc.
and other telecommunications providers such as AT&T Corp., MCI WorldCom, Inc.
and Cable & Wireless, Inc.
Further acceptance of open systems architectures and the development of
industry standards in the call processing market may eliminate some of the
technical barriers to entry, allowing additional competitors to enter the
26
<PAGE>
market. Many of our existing competitors have larger customer and installed
bases and substantially greater technical, financial and marketing resources
than we do. In addition, some of our competitors have a marketing advantage
because they can sell their call processing equipment or facsimile solutions as
part of their broader product offerings. We expect our competitors will continue
to offer improved product technologies and capabilities. The availability of
these products could cause sales of our existing products to decline. For these
reasons, we may be unable to compete successfully against our current and future
competitors.
Our average sales prices have declined for some of our products.
The average sales prices in our basic voice messaging products have
declined due to competitive pressures. In the future, prices may decline in some
of our other product lines. If the average sales prices of our more significant
product lines fall, our overall gross margins will likely fall. To offset and
forestall declining average sales prices, we must continue to develop product
enhancements and new products with advanced features that are likely to generate
higher-margin incremental revenue. If we are unable to do so in a timely manner
or if our products do not achieve significant customer acceptance, our business,
results of operations and financial condition may suffer.
We may be unable to adequately protect our proprietary rights.
To succeed, we must adequately protect our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
nondisclosure and other agreements and technical measures to protect our
proprietary
27
<PAGE>
technology, but those measures may be insufficient. We have one patent in the
area of unified messaging, but our competitors may challenge or circumvent the
claims in that patent. Our current patent, or any future patents, may never
provide us with any competitive advantages. Other measures that we take to
protect our proprietary technology may not prevent or deter misappropriation of
our technology or the development of technologies with similar characteristics.
Moreover, our use of open systems architecture in the design of our products may
make it easier for competitors to misappropriate or replicate our designs and
developments.
We may face liability for infringement of third-party proprietary rights.
Historically, competitors in the computer-telephony software industry have
filed numerous allegations of patent infringement, resulting in considerable
litigation. We have received claims of patent infringement from several parties
and will probably receive additional claims in the future. While none of those
claims has led to litigation, they may yet result in litigation. Any litigation,
regardless of our success, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation could
also force us to
. stop or delay selling, or using, products that use the challenged
intellectual property;
. pay damages for infringement;
. obtain licenses, which may be unavailable on acceptable terms; or
. redesign products or services that use the infringing technology.
We face risks from expansion of our international operations.
Our growth depends in part on continued expansion of our international
sales. International sales generated approximately 16%, 15% and 18% of our net
sales in the years ended December 31, 1997, 1998 and 1999, respectively. We have
spent significant management attention and financial resources on our
international operations. A significant portion of our revenues are subject to
the risks associated with international sales, which include
. difficulty adapting products to local languages and telephone system
technology;
. inability to respond to changes in regulatory requirements;
. inability to meet special standards requirements;
28
<PAGE>
. exposure to exchange rate fluctuations;
. tariffs and other trade barriers;
. difficulties in staffing and managing international operations;
. potentially adverse tax consequences; and
. uncertainties arising from local business practices and cultural
considerations.
Currently, substantially all of our international sales are denominated in
U.S. dollars. Increases in the value of the dollar against local currency could
cause our products to become relatively more expensive to customers in a
particular country, leading to reduced sales or profitability in that country.
As we continue to expand our international operations, we expect our non-dollar-
denominated sales and our exposure to gains and losses on international currency
transactions to increase. We do not currently engage in transactions to hedge
against the risk of currency fluctuations, but we may do so in the future.
We depend on certain key employees.
To succeed, we must attract and retain key personnel in engineering,
research and development, marketing, sales, finance and administration. In
particular, we depend to a significant degree on the efforts of our senior
management team. Competition for skilled personnel is intense. The failure to
recruit such personnel or the loss of the services of existing key persons in
any functional area could adversely affect our current operations and new
product development efforts. We do not maintain material key person life
insurance.
29
<PAGE>
We may experience difficulties in managing our growth.
Growth in our business has placed, and will continue to place, significant
demands on our management and operations. To succeed, our officers and key
employees must manage growth successfully. We must continue to implement and
improve our operational, financial and management information systems. In
addition, we must expand, train and manage our employee base. We may be unable
to timely and successfully accomplish these tasks.
We depend on third parties for certain key components of our products.
We use standard computer hardware for our products. Most of the components
we use are readily available. However, only three domestic suppliers can provide
voice processing circuit boards in the quantities we need. In addition, only two
domestic suppliers can provide our facsimile processing circuit boards in the
quantity we require. Historically, we have relied almost exclusively on Dialogic
Corporation for our voice cards, and on Dialogic and Brooktrout Technologies,
Inc. for our fax cards. We rely on those suppliers primarily because of volume
price discounts and the cost and effort required to develop software for an
alternate voice or fax card. Significant delays, interruptions or reductions in
our supply of voice or fax cards, or unfavorable changes to price and delivery
terms could adversely affect our business.
Our stock price may be highly volatile.
The market price of our common stock has been, and may continue to be,
highly volatile. The future price of the common stock will fluctuate in response
to factors such as
. new product announcements or changes in product pricing policies by us
or our competitors;
. quarterly fluctuations in our operating results;
. announcements of technical innovations;
. announcements relating to strategic relationships or acquisitions;
. changes in earnings estimates by securities analysts; and
. general conditions in the computer-telephony market.
In addition, the market prices of securities issued by many companies,
particularly in high-technology industries, are volatile for reasons unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock.
30
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, each of which could adversely affect the
value of the company's investments. The Company does not currently use
derivative financial instruments.
The Company maintains a short-term investment portfolio consisting of
interest bearing securities with an average maturity of less than one year.
These securities are classified as "available for sale" securities. The interest
bearing securities are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels at December 31, 1999, the fair
value of the portfolio would decline by an immaterial amount. Because the
Company has the ability to hold its fixed income investments until maturity, it
does not expect its operating results or cash flows to be affected to any
significant degree by a sudden change in market interest rates on its securities
portfolio.
The Company has assets and liabilities denominated in certain foreign
currencies related to the Company's international sales operations. The Company
has not hedged its translation risk on these currencies as the company has the
ability to hold its foreign-currency denominated assets indefinitely and does
not expect that a sudden or significant change in foreign exchange rates would
have a material impact on future net income or cash flows.
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AVT Corporation:
We have audited the accompanying balance sheets of AVT Corporation (a Washington
corporation) as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Medialinq Services Group,(formerly MediaTel Corp.), a company acquired during
1999 in a transaction accounted for as a pooling of interests, as discussed in
Note 8. Such statements are included in the consolidated financial statements of
AVT Corporation and reflect total assets and total revenues of 11 percent and 21
percent in 1998, and 13 percent and 25 percent in 1997, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for MediaLinq Services Group, is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AVT Corporation as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington
March 28, 2000
______________
32
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
MediaTel Corporation:
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of MediaTel Corporation
(the "Company") at December 31, 1997 and 1998, and results of their operations
and their cash flows for each of the three years ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 19, 1999
33
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
---------- -----------
<S> <C> <C>
ASSETS (in thousands)
Current assets:
Cash and cash equivalents.................................................... $14,466 $ 23,923
Short-term investments....................................................... 28,225 51,095
Accounts receivable, less allowance of $929 and $1,104....................... 17,563 20,303
Inventories.................................................................. 5,560 5,319
Deferred and prepaid income taxes............................................ 1,461 3,000
Prepaid expenses and other................................................... 1,536 2,089
------- --------
Total current assets..................................................... 68,811 105,729
Equipment and leasehold improvements, net....................................... 5,417 6,630
Intangibles, net................................................................ 7,677 5,926
Deferred income taxes........................................................... 3,743 3,424
------- --------
$85,648 $121,709
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 4,793 $ 5,432
Other current liabilities....................................................... 9,191 12,748
Income taxes payable............................................................ 578 1,324
------- --------
Total current liabilities................................................ 14,562 19,504
------- --------
Commitments (Note 6)
Shareholders' equity:
Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none
outstanding................................................................. -- --
Common stock, par value $.01 per share, 60,000,000 shares authorized;
14,230,575 and 15,318,527 outstanding....................................... 142 153
Additional paid-in capital................................................... 42,987 55,658
Retained earnings............................................................ 27,957 45,812
Accumulated other comprehensive income....................................... -- 582
------- --------
Total shareholders' equity............................................... 71,086 102,205
------- --------
$85,648 $121,709
======= ========
</TABLE>
See the accompanying notes to these consolidated financial statements.
34
<PAGE>
AVT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales......................................................... $76,971 $102,977 $130,224
Cost of sales..................................................... 29,233 37,282 44,958
------- -------- --------
Gross profit..................................................... 47,738 65,695 85,266
------- -------- --------
Operating expenses:
Research and development......................................... 7,988 9,474 10,311
Selling, general and administrative.............................. 26,040 35,035 44,282
Non-recurring charges............................................ 11,025 287 3,255
------- -------- --------
Total operating expenses........................................ 45,053 44,796 57,848
------- -------- --------
Operating income.................................................. 2,685 20,899 27,418
------- -------- --------
Other income:
Interest income.................................................. 842 1,169 2,133
Other............................................................ 262 89 (140)
------- -------- --------
Other income.................................................... 1,104 1,258 1,993
------- -------- --------
Income before income tax expense.................................. 3,789 22,157 29,411
Income tax expense................................................ 1,470 8,078 11,556
------- -------- --------
Net income........................................................ $ 2,319 $ 14,079 $ 17,855
======= ======== ========
Basic earnings per common share................................... $ 0.18 $ 1.03 $ 1.20
Weighted average common shares outstanding........................ 12,944 13,722 14,826
Diluted earnings per common share................................. $ 0.16 $ 0.94 $ 1.12
Weighted average common and common equivalent shares outstanding.. 14,410 15,008 15,928
</TABLE>
See the accompanying notes to these consolidated financial statements.
35
<PAGE>
AVT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------------ paid-in Comprehensive Retained shareholders'
Shares Amount capital Income earnings equity
------------ ---------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except share data)
Balance at December 31, 1996........................... 12,418,663 124 $30,776 -- $11,733 $ 42,633
Stock issued in acquisition............................ 191,032 2 666 -- -- 668
Warrants issued in acquisition......................... -- -- 700 -- -- 700
Exercise of stock options.............................. 506,091 5 1,484 -- -- 1,489
Tax benefit of stock options
exercised........................................... -- -- 562 -- -- 562
Net income............................................. -- -- -- -- 2,319 2,319
---------- ------- -------- ------ -------- --------
Balance at December 31, 1997........................... 13,115,786 131 34,188 -- 14,052 48,371
Stock issued in acquisition............................ 52,200 1 249 -- -- 250
Exercise of stock options.............................. 1,062,589 10 3,901 -- -- 3,911
Tax benefit of stock options
exercised........................................... -- -- 4,649 -- -- 4,649
Dividend declared -- -- -- -- (174) (174)
Net income............................................. -- -- -- -- 14,079 14,079
---------- ------- -------- ------ -------- --------
Balance at December 31, 1998........................... 14,230,575 142 42,987 -- 27,957 71,086
Exercise of stock options.............................. 1,087,952 11 6,608 -- -- 6,619
Tax benefit of stock options
exercised........................................... -- -- 6,063 -- -- 6,063
Unrealized gain on marketable securities -- -- -- 582 -- 582
Net income............................................. -- -- -- -- 17,855 17,855
---------- ------- -------- ------ -------- --------
Balance at December 31, 1999........................... 15,318,527 $ 153 $55,658 $ 582 $45,812 $102,205
========== ======= ======== ====== ======== ========
</TABLE>
See the accompanying notes to these consolidated financial statements.
36
<PAGE>
AVT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 2,319 $ 14,079 $ 17,855
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 3,186 4,064 4,882
Non-recurring charges................................................. 11,025 287 460
Stock compensation expense............................................ -- 5 --
Deferred income taxes................................................. (3,410) 215 (1,220)
Changes in current assets and liabilities:
Accounts receivable.................................................. (2,321) (4,655) (2,740)
Inventories.......................................................... (1,239) (652) 241
Prepaid expenses and other assets.................................... (453) (700) (553)
Accounts payable..................................................... (251) 865 639
Accrued compensation and benefits.................................... 21 2,316 1,072
Income taxes payable................................................. 2,038 2,171 6,481
Other accrued liabilities............................................ 1,221 268 2,025
-------- -------- --------
Net cash provided by operating activities.............................. 12,136 18,263 29,142
-------- -------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements...................... (2,302) (3,550) (4,276)
Cash paid in acquisition, net of cash acquired........................ (15,426) -- --
Purchase of short-term investments.................................... -- (13,957) (21,960)
Net proceeds from the sale of investments............................. 1,216 37 --
Other intangibles and long-term assets................................ (64) (280) (68)
-------- -------- --------
Net cash used in investing activities................................ (16,576) (17,750) (26,304)
-------- -------- --------
Cash flows from financing activities:
Long-term borrowings.................................................. 664 -- --
Repayment of long-term debt........................................... (1,273) (991) --
Proceeds from exercise of common stock options........................ 1,489 3,906 6,619
Dividends paid on stock............................................... -- (126) --
-------- -------- --------
Net cash provided by financing activities............................ 880 2,789 6,619
-------- -------- --------
Net (decrease) increase in cash..................................... (3,560) 3,302 9,457
Cash and cash equivalents at beginning of period....................... 14,724 11,164 14,466
-------- -------- --------
Cash and cash equivalents at end of period............................. $ 11,164 $ 14,466 $ 23,923
======== ======== ========
Cash paid for interest................................................. $ 118 $ 51 $ 191
======== ======== ========
</TABLE>
See the accompanying notes to these consolidated financial statements.
37
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
AVT Corporation (the Company), a Washington corporation, provides software-
based computer-telephony products for medium-sized enterprises. The Company's
products address the voice messaging, call center, fax server and production fax
markets and are distributed primarily through independent distributors and
value-added resellers. The consolidated financial statements include the
accounts of all subsidiaries, all of which are wholly owned, from the date of
acquisition, including RightFAX, Inc., CommercePath, Inc. and MediaTel
Corporation. All intercompany accounts have been eliminated.
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 1,609,596 shares of the Company's common stock, 10% of which were
deposited into an escrow account to compensate the Company for certain losses
that it may incur as a result of breaches of representation and warranties and
other agreements by MediaTel. In addition, the Company assumed all outstanding
options to purchase MediaTel shares, which became exercisable for approximately
291,700 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 5,025
shares that were returned to the Company for losses, were distributed to the
former MediaTel shareholders.
This transaction was accounted for as a pooling of interests. These
consolidated financial statements have been prepared to reflect the restatement
of all periods presented to include the accounts of MediaTel. The historical
results do not purport to be indicative of future results.
Cash and Cash Equivalents
The Company's policy is to invest cash in excess of operating requirements
in income-producing investments. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Cash and cash
equivalents include all cash balances and highly liquid investments in a money
market fund. Investments are recorded at cost, which approximates market prices.
Inventories
Inventories consist primarily of computer assemblies, components and
related equipment, and are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost and are depreciated
on the straight-line method over the estimated useful lives of the assets, which
range from three to five years. Equipment and leasehold improvements consist of
the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
Computers and other equipment.............. $ 13,533 $ 17,376
Leasehold improvements..................... 950 1,176
Furniture and fixtures..................... 1,150 1,241
-------- --------
15,633 19,793
Less accumulated depreciation.............. (10,216) (13,163)
-------- --------
Equipment and leasehold improvements, net.. $ 5,417 $ 6,630
======== ========
</TABLE>
38
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
Intangibles
Goodwill is being amortized using the straight-line method over its
estimated useful life of seven years. License agreements are amortized using the
straight-line method over the remaining lives of the related patents, which
range from approximately 6 to 12 years. Amortization expense for the years ended
December 31, 1997, 1998 and 1999 was $1,609,000, $1,674,000, and $1,818,000,
respectively.
December 31,
-----------------
1998 1999
------- -------
(in thousands)
Goodwill on CommercePath acquisition.. $ 1,829 $ 1,829
Goodwill on RightFAX acquisition...... 5,906 5,906
License agreements.................... 4,516 4,583
------- -------
12,251 12,318
Less accumulated amortization......... (4,574) (6,392)
------- -------
Intangibles, net...................... $ 7,677 $ 5,926
======= =======
Other Current Liabilities
December 31,
-----------------
1998 1999
------ -------
(in thousands)
Accrued compensation and benefits..... $ 4,097 $ 5,169
Deferred maintenance revenue.......... 2,210 4,310
Other................................. 2,884 3,269
------- -------
Other current liabilities............. $ 9,191 $12,748
======= =======
Use of Estimates
The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain prior period balances have been reclassified to conform with the current
period presentation.
Revenue Recognition
Revenues from sales to dealers are recognized when the products are
shipped. When the Company has an installation obligation, revenues are
recognized when product installation is complete. Revenues from document
delivery services are recognized when services are provided. Revenues from
software maintenance contracts are recognized over the maintenance periods,
generally one year. Revenues from extended warranty agreements are recognized
over the lives of the related service contracts on the straight-line method. The
Company accrues estimated costs of technical support to customers as related
revenues are recognized.
Research and Development Costs
Research and development costs are expensed as incurred. The Company has
not capitalized any software development costs, as technological feasibility is
not generally established until substantially all development is complete.
39
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share were computed by dividing net income by the
sum of the weighted average number of shares of common stock outstanding during
the year plus the net additional shares that would have been issued had all
dilutive options been exercised less shares that would be repurchased with the
proceeds from such exercise. Dilutive options are those that have an exercise
price which is less than the average stock price during the year.
The computation of diluted earnings per common share is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
-------- -------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Diluted earnings per common share:
Net income........................................................ $ 2,319 $14,079 $17,855
------- ------- -------
Weighted average common shares outstanding........................ 12,944 13,722 14,826
Plus: dilutive options assumed exercised.......................... 3,073 2,652 3,199
Less: shares assumed repurchased with proceeds from exercise...... (1,675) (1,366) (2,097)
Plus: other common stock equivalents.............................. 68 - -
------- ------- -------
Weighted average common and common equivalent shares outstanding.. 14,410 15,008 15,928
------- ------- -------
Diluted earnings per common share................................. $0.16 $0.94 $ 1.12
======= ======= =======
</TABLE>
Concentration of Credit Risk; Export Sales
The Company achieves broad U.S. market coverage for its products primarily
through a nationwide network of telephony-oriented dealers and computer-oriented
value-added resellers. For the years ended December 31, 1997, 1998 and 1999, no
customer represented 10% or greater of the Company's net sales. The Company
performs ongoing credit evaluations of its customers' financial conditions and,
generally, no collateral is required.
The Company's sales by country were as follows:
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
(in thousands)
United States............ $64,819 $ 88,019 $106,340
Canada................... 3,395 3,914 3,965
United Kingdom........... 1,451 3,307 4,650
Other.................... 7,306 7,737 15,269
------- -------- --------
$76,971 $102,977 $130,224
======= ======== ========
40
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Reporting
The Company adopted Statement of Accounting Standard No. 131 "Disclosures
about Segments of an Enterprise and Related Information "(SFAS No. 131) during
1998. SFAS No. 131 requires companies to disclose certain information about
operating segments. Based on the criteria within SFAS No. 131, the Company has
determined that it has one reportable segment, computer telephony products.
Sales of the Company's product by categories and amount are as follows:
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
(in thousands)
Enhanced fax products and services........... $43,133 $ 68,383 $ 85,295
Advanced messaging and call center products.. 24,276 28,159 38,494
Basic messaging products..................... 9,562 6,435 6,435
------- -------- --------
$76,971 $102,977 $130,224
======= ======== ========
2. Income Taxes
Income taxes are provided for in the consolidated statements of income
using the asset and liability method. The difference between the provision for
income taxes and the statutory tax rate applied to income before income tax
expense is due to certain expenses not being deductible for tax purposes and
research and experimentation credits.
The following is a reconciliation from the U.S. statutory rate to the
effective tax rate:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Amount % Amount % Amount %
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate.............................. $1,288 34.0% $7,533 34.0 $10,294 35.0%
Research and experimentation credit................ (105) (2.8) (150) (0.7) (26) --
Nondeductible merger costs......................... -- -- -- -- 894 3.0
Nondeductible goodwill amortization................ 230 6.1 319 1.5 379 1.3
Nontaxable interest income......................... (235) (6.2) (227) (1.0) (515) (1.8)
State taxes and other.............................. 292 7.7 603 2.7 1,158 3.9
FSC Benefit........................................ -- -- -- -- (628) (2.1)
------ ---- ------ ---- ------- -----
Income tax expense................................. $1,470 38.8% $8,078 36.5% $11,556 39.3%
====== ==== ====== ==== ====== =====
</TABLE>
41
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense and cash paid for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Current......................................................................... $ 5,427 $7,863 $12,776
Deferred........................................................................ (3,957) 215 (1,220)
------- ------ -------
Total income tax expense...................................................... $ 1,470 $8,078 $11,556
======= ====== =======
Cash paid for income taxes...................................................... $ 2,839 $5,672 $ 5,237
======= ====== =======
</TABLE>
Deferred taxes result from temporary differences relating to items that are
expensed for financial reporting, but are not currently deductible for income
tax purposes.
Significant components of the Company's deferred tax asset as of December 31,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances............................................... $ 409 $ 404
Inventories.................................................................. 85 461
Depreciation and amortization................................................ 161 -
Accrued compensation and benefits............................................ 192 349
Purchased in-process research and development................................ 3,549 3,397
Deferred maintenance revenue................................................. 468 1,529
Other........................................................................ 340 284
------- ------
Deferred tax assets and prepaid income taxes................................... $ 5,204 $6,424
======= ======
</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 5,700,000 shares of common stock for issuance
pursuant to these plans upon exercise of outstanding options and upon exercise
of options to be granted in the future. Options generally vest over three to
four years and expire 10 years from the date of grant. The options are
exercisable at prices determined at the discretion of the Board of Directors.
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
cost has been recognized and is based on the difference between the exercise
price and fair market value at the date of grant, if any. Had compensation cost
for stock option grants made in 1997, 1998 and 1999 been determined using the
fair value method consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
42
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------ ------- -------
(in thousands expect per share data)
<S> <C> <C> <C>
Net Income: As Reported......................... $2,319 $14,079 $17,855
Pro Forma........................... $1,114 $11,830 $15,622
Basic EPS: As Reported......................... $ 0.18 $ 1.03 $ 1.20
Pro Forma........................... $ 0.09 $ 0.86 $ 1.05
Diluted EPS: As Reported......................... $ 0.16 $ 0.94 $ 1.12
Pro Forma........................... $ 0.08 $ 0.79 $ 1.12
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1999: risk-free
interest rates of 6.85%; expected lives of five years; expected volatility of
43%; and $0 dividends. For 1998 the assumptions were: risk-free interest rates
of 6.25%; expected lives of five years; expected volatility of 44%; and $0
dividends. For 1997 the following assumptions were used: risk-free interest
rates of 6.85%; expected lives of five years; expected volatility of 49%; and $0
dividends.
Stock Option Plans
A summary of the status of the Company's stock option plans at December 31,
1997, 1998 and 1999, and the changes during the years then ended, is presented
in the table and narrative below:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ---------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- --------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period................. 3,189,547 $ 4.12 3,125,760 $ 5.33 2,898,987 $ 9.88
Granted............................................ 548,317 $10.07 903,850 $18.50 1,650,795 $27.94
Exercised.......................................... (506,093) $ 2.94 (1,031,959) $ 3.53 (978,770) $ 6.26
Canceled........................................... (106,011) $ 4.54 (98,664) $11.05 (154,621) $21.21
--------- ------ ----------- ------ ---------- ------
Outstanding at end of period....................... 3,125,760 $ 5.33 2,898,987 $ 9.88 3,416,391 $19.25
========= ====== =========== ====== ========== ======
Exercisable at end of period....................... 1,564,231 $ 3.32 1,504,658 $ 5.68 1,209,609 $ 9.16
========= ====== =========== ====== ========== ======
Weighted average fair value of options granted..... $ 5.26 $ 9.12 $ 11.77
</TABLE>
Options outstanding have exercise prices ranging from $0.50 to $43.75 per
share, with weighted average remaining contractual lives of 7.1, 7.4 and 8.0
years at December 31, 1997, 1998 and 1999, respectively. At December 31, 1999,
521,571 shares of the Company's common stock were available for future grant
under the Company's stock option plans. Information relating to stock options
outstanding and stock options exercisable at December 31, 1999 is as follows:
43
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Exercise Prices Shares Contractual Life Ex. Price Shares Ex. Price
------------------------ ------ ---------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$0.80 - $8.75...................... 939,969 6 $ 6.36 883,040 $ 6.44
$8.76 - $17.50..................... 502,325 8 $ 14.21 218,090 $14.01
$17.51 - $26.25..................... 1,512,977 9 $ 24.51 108,479 $21.54
$26.26 - $43.75..................... 461,120 10 $ 33.77 -- --
--------- -- --------- --------- --------
3,416,391 8 $ 9.25 1,209,609 $ 9.16
========= == ========= ========= ========
</TABLE>
Warrants
At December 31, 1999, there were outstanding warrants to purchase 77,312
shares of the Company's common stock at $6.68 per share. The warrants were
issued in connection with the Telcom Technologies Inc. acquisition discussed in
Note 8 below.
4. Line of Credit
At December 31, 1999, the Company had a $4.0 million unsecured revolving
line of credit, none of which was used during the years ended December 31, 1998
and 1999. The Company's line of credit expires in August 2001, and contains
certain financial covenants and restrictions as to various matters, including
the Company's ability to pay cash dividends without the bank's prior approval.
The Company is currently in compliance with such financial covenants and
restrictions. Borrowings under the line of credit bear interest at the bank's
prime rate or, at the Company's option, its interbank offering rate plus 1.50%.
At December 31, 1999, the bank's prime rate was 8.5%, and its interbank offering
rate was 5.8%.
5. Short-Term Investments
The Company has classified its investments as "available-for-sale" and
recorded these investments at estimated fair value, with unrealized gains and
losses, when material, reported in other comprehensive income.
Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income over the term of the
investment. The cost of securities sold is based upon the specific
identification method. Available-for-sale securities as of December 31, 1998 and
1999 consisted primarily of municipal notes and bonds whose amortized cost
approximates estimated fair value. As of December 31, 1998 and 1999 average
maturity for these investments was eight and ten months respectively.
44
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Commitments and Contingencies
Leases
The Company leases its office space under noncancelable operating leases.
Rent expense under the noncancelable leases amounted to $1,048,000 in 1997,
$1,290,000 in 1998 and $2,154,000 in 1999. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):
2000..................................................... $2,164
2001..................................................... 1,849
2002..................................................... 837
2003..................................................... 67
------
$4,917
======
Retirement Savings Plan
The Company offers a 401(k) profit-sharing plan to substantially all of its
employees. Company contributions are determined annually and are at the
discretion of the Board of Directors. Contributions made to the plan were
$165,000 in 1997, $235,000 in 1998 and $416,000 in 1999.
License Agreements
In connection with the acquisition of a business in 1989, the Company
agreed to make royalty payments from future sales of the Company's products, up
to a maximum of $2,800,000 in total, payable up to $70,000 per quarter, before
adjustment for increases in the consumer price index. In February 1995, the
Company made a prepayment of $1,808,000 to satisfy this royalty commitment. This
intangible is being amortized over the remainder of the original agreement's
term (67 months). Amounts charged to expense under this agreement were $324,000
in each of 1997, 1998 and 1999.
In addition to the agreement mentioned above, the Company has two
nonexclusive licenses to sell products using patented technology. In exchange
for the licenses, the Company has made quarterly payments equal to 6% of net
revenues from sales of components utilized in the Company's products that use
the licensed technology.
In September 1995, the Company renegotiated its royalty obligation for one
of these licenses by issuing a note in the amount of $1,937,000, payable in 12
equal quarterly installments of $161,417 each, with the first installment paid
upon the signing of the agreement. The Company accrued interest expense at an
imputed rate of 8.75% per annum. This note was satisfied at December 31, 1998.
The Company recorded an intangible for this prepayment in the amount of
$1,725,000. The intangible is being amortized on a straight-line basis over the
remaining average lives of the related patents (approximately 12 years).
In July 1996, the Company renegotiated its royalty obligation for the
second license by issuing a note in the amount of $450,000, payable over two
quarters, with the first installment paid upon the signing of the agreement. The
Company accrued interest expense at an imputed rate of 8.5% per annum. This note
was satisfied at December 31, 1996. The Company recorded an intangible for this
prepayment in the amount of $446,000. The intangible is being amortized on a
straight-line basis over the remaining average lives of the related patents
(approximately seven years). Amounts charged to expense for the two nonexclusive
licenses were $212,000 in each of 1997, 1998 and 1999.
45
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Proceedings
In May 1998, CallWare brought suit against AVT in federal court in Salt
Lake City, Utah, alleging various claims relating to purported false advertising
by AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare had claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit was dismissed in November,
1999 as a result of a settlement payment of $150,000 made by the Company's
insurers to avoid the expense of further litigation. AVT continued to assert
that the lawsuit was without merit.
On March 21, 2000, a class-action lawsuit was filed in the United States
District Court for the Western District of Washington alleging that during the
period January 20, 2000 through March 17, 2000, the Company and several officers
and directors made or participated in misrepresentations about the Company's
business and future prospects. Since the March 21 lawsuit was filed,
additional lawsuits have been filed that are identical to the March 21 lawsuit,
with the exception of the name of the plaintiff. Each lawsuit seeks unspecified
damages on behalf of a proposed class of purchasers of the Company's stock
during the specified period. The Company believes that the allegations of the
lawsuits are without merit and intends to vigorously defend the actions.
7. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deductions(1) of period
----------- ---------- --------- -------- ------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
December 31, 1997............. $788 489 97 465 $ 909
December 31, 1998............. $909 309 -- 289 $ 929
December 31, 1999............. $929 727 -- 552 $1,104
</TABLE>
(1) Amounts include write-offs of accounts receivable deemed uncollectable.
8. Businesses Acquired
On January 3, 1997, the Company acquired selected assets and liabilities of
Telcom Technologies Inc., a developer of NT-based open-architecture automatic
call distribution systems. The purchase price for the acquisition was $3.5
million in cash, plus warrants to purchase 200,000 shares of the Company's
common stock at $6.68 per share, which may be exercised at any time prior to
January 3, 2002. The Company accounted for the business combination as a
purchase and recognized a nonrecurring charge of $3.9 million in the first
quarter of 1997, representing the value of the purchased, in-process research
and development.
On October 22, 1997, the Company acquired all the outstanding capital stock
of CommercePath, Inc. (CommercePath) from Forest City Trading Group, Inc. for
$10.4 million in cash. The Company accounted for the business combination as a
purchase and recorded a nonrecurring charge of $7.1 million in the fourth
quarter of 1997, representing the value of the purchased, in-process research
and development, and recorded $1.8 million of goodwill that it will amortize
over seven years.
The pro forma unaudited consolidated operating results of the Company for
the year ended December 31, 1997, assuming the acquisition of CommercePath had
been made as of January 1, 1997, are summarized below:
<TABLE>
<CAPTION>
1997
------------------------
Pro Forma
Actual (unaudited)
------ -----------
(in thousands, except per share data)
<S> <C> <C>
Net sales................................ $76,971 $82,348
Net income.............................. $ 2,319 $ 1,816
Diluted earnings per share.............. $ 0.16 $ 0.13
</TABLE>
46
<PAGE>
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization resulting from
allocating a portion of the purchase price to goodwill. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1997, as the case may be, or
future results of operations of the consolidated entity.
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 1,609,596 shares of the Company's common stock, 10% of which were
deposited into an escrow account to compensate the Company for certain losses
that it may incur as a result of breaches of representation and warranties and
other agreements by MediaTel. In addition, the Company assumed all outstanding
options to purchase MediaTel shares, which became exercisable for approximately
291,700 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 5,025
shares that were returned to the Company for losses, were distributed to the
former MediaTel shareholders. This transaction was accounted for as a pooling of
interests.
The following summarizes amounts reported by the Company and MediaTel prior
to the merger for the years ended December 31, 1997, 1998 and the quarter ended
March 31, 1999.
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended March 31,
------------------------- -----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Net Sales
AVT..................... $58,091 $ 81,126 $22,621
MediaTel................ 18,880 21,851 6,222
------- -------- -------
Combined $76,971 $102,977 $28,843
======= ======== =======
Net Income
AVT..................... $ 729 $ 11,610 $ 3,313
MediaTel................ 1,590 2,469 629
------- -------- -------
Combined $ 2,319 $ 14,079 $ 3,942
======= ======== =======
</TABLE>
47
<PAGE>
9. Consolidated Quarterly Financial Data and Market Information
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- -------- -------- --------- --------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $22,313 $24,809 $26,448 $29,407 $28,843 $31,864 $33,247 $36,270
Cost of sales...................... 8,523 9,442 9,295 10,021 10,174 11,322 11,558 11,904
------- ------- ------- ------- ------- ------- ------- -------
Gross profit....................... 13,790 15,367 17,153 19,386 18,669 20,542 21,689 24,366
Operating expenses:
Research and development.......... 2,339 2,334 2,452 2,350 2,621 2,357 2,565 2,768
Selling, general and
administrative................... 7,612 8,397 9,178 9,847 10,277 11,073 11,151 11,782
Non-recurring charges............. 287 -- -- -- -- 2,388 -- 867
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 10,238 10,731 11,630 12,197 12,898 15,818 13,716 15,417
------- ------- ------- ------- ------- ------- ------- -------
Operating income................... 3,552 4,636 5,523 7,189 5,771 4,724 7,973 8,949
Other income, net.................. 254 346 270 386 427 384 512 670
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax
expense............................ 3,806 4,982 5,793 7,575 6,198 5,108 8,485 9,619
Income tax expense................. 1,401 1,823 2,129 2,725 2,256 2,710 3,100 3,489
------- ------- ------- ------- ------- ------- ------- -------
Net income......................... $ 2,405 $ 3,159 $ 3,664 $ 4,850 $ 3,942 $ 2,398 $ 5,385 $ 6,130
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per common
share (1).......................... $ 0.16 $ 0.21 $ 0.24 $ 0.31 $ 0.25 $ 0.15 $ 0.33 $ 0.37
Net income excluding nonrecurring
Items.............................. $ 2,589 $ 3,159 $ 3,664 $ 4,850 $ 3,942 $ 4,786 $ 5,385 $ 6,685
Diluted earnings per common share
excluding nonrecurring items(1).... $ 0.17 $ 0.21 $ 0.24 $ 0.31 $ 0.25 $ 0.30 $ 0.33 $ 0.40
Weighted average common and
common equivalent shares
outstanding........................ 14,949 15,245 15,489 15,460 15,666 15,967 16,363 16,578
Stock price range (2)
High.............................. $ 20.31 $ 23.50 $ 25.75 $ 29.69 $ 30.94 $ 38.13 $ 40.50 $ 47.50
Low............................... $ 13.38 $ 17.13 $ 19.63 $ 12.19 $ 20.13 $ 18.25 $ 25.88 $ 26.13
</TABLE>
(1) Earnings per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income per
share amounts will not necessarily equal the total for the year.
(2) The Company's common stock is traded on the Nasdaq National Market under
the symbol "AVTC." As of December 31, 1999, there were approximately 179
shareholders of record of the Company's common stock. The Company has not
paid any cash dividends on its common stock.
48
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III (Item 10-13) is incorporated by
reference to information in the Company's definitive proxy statements which will
be filed pursuant to Regulation 14a within 120 days of December 31, 1999.
49
<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 financial statements
. Consolidated Balance Sheets--December 31, 1999 and 1998
. Consolidated Statements of Income--Years ended December 31, 1999,
1998 and 1997
. Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1999, 1998 and 1997
. Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998 and 1997
. Notes to Consolidated Financial Statements
. Report of Independent Public Accountants
2. Index to Financial Statement Schedules
None
3. Index to Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation of AVT Corporation (A) (Exhibit
3.1)
3.2 Amended and Restated Bylaws of AVT Corporation (A)(Exhibit 3.2)
4.1 Form of Warrant, dated January 3, 1997, issued by Applied Voice
Technology, Inc. to shareholders of Telcom Technologies, Inc. (E)
(Exhibit 4.1)
+10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
+10.2 Restated 1989 Stock Option Plan (F)
+10.3 1986 Incentive Stock Option Plan (A) (Exhibits 10.3)
+10.4 Management Incentive Compensation Plan (A) (Exhibit 10.4)
+10.5 Employment Agreement dated May 1, 1993 between Applied Voice
Technology, Inc. and Richard J. LaPorte (A) (Exhibit 10.5)
+10.6 Form of Indemnification Agreement between Applied Voice Technology
and each of its directors and officers (A) (Exhibit 10.6)
10.8 Lease Agreement dated June 30, 1989 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. as amended (A)
(Exhibit 10.11)
10.9 Second Amendment to Lease Agreement dated February 1, 1995 between
Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (D) (Exhibit 10.11)
10.10 Third Amendment to Lease Agreement dated May 28, 1997 between
Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (G) ( Exhibit 10.10)
10.11 Lease Agreement dated May 28, 1997 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. (G) Exhibit
10.11)
#10.12 Amended Patent License Agreement dated September 29, 1995 between
Syntellect Technology Corp. and Applied Voice, Technology Inc. (B)
(Exhibit 10.1)
10.13 Master Software Manufacturing License Agreemented dated June 11,
1992 between Intelligent Environments Inc. and Applied Voice
Technology, Inc. as amended (A) (Exhibit 10.16)
50
<PAGE>
10.14 Agreement and Plan of Merger among Applied Voice Technology, Inc.,
Cracchiolo & Feder, Inc., the shareholders of Cracchiolo & Feder,
Inc. and CFI Acquisition Corp., dated as of January 2, 1996. (C)
(Exhibit 10.1)
10.15 Registration Rights Agreement among Applied Voice Technology,
Inc., Joseph J. Cracchiolo and Bradley H. Feder, dated as of
January 2, 1996 (C) (Exhibit 10.2)
10.16 Agreement and Plan of Merger among AVT Corporation, MediaTel
Corporation and Goldengate Acquisition Corp., dated as of April
13, 1999. (H) (Exhibit 10.1)
10.17 Registration Rights Agreement among AVT Corporation and the
shareholders of MediaTel Corporation, dated as of April 14,
1999.(H) (Exhibit 10.2)
10.18 Escrow Agreement and Indemnification Agreement among AVT
Corporation, Sanjeev Malaney, as Securityholder Agent, and
ChaseMellon Shareholder Services, LLC, as escrow agent, dated as
of April 14, 1999.(H) (Exhibit 10.3)
10.19 Employment Agreement dated April 14, 1999 between AVT Corporation
and David Sohm.
10.20 Loan Agreement and Promissory Note dated August 15, 1999 between
U.S. Bank of Washington and AVT Corporation
21.1 Subsidiaries of AVT Corporation
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of PriceWaterhouseCoopers LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for Year ended December 31, 1998.
27.3 Restated Financial Data Schedule for Year ended December 31, 1997.
27.4 Restated Financial Data Schedule for the three months ended March
31, 1999.
27.5 Restated Financial Data Schedule for the three months ended March
31, 1998.
_________________
(A) Previously filed with, and incorporated herein by reference to, designated
exhibits to Registration Statement on Form S-1 of Applied Voice Technology,
Inc. File No. 333-85452.
(B) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 2, 1996.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on Form 10-K.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 3, 1997.
(F) Previously filed with, and incorporated by reference to, appendix A to the
Company's definitive Proxy Statement dated April 16, 1996.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K.
(H) Previously filed with, and incorporated by reference to, designated exhibit
to the Company Current Report on Form 8-K/A dated April 14, 1999.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
51
<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 undersigned, thereunto duly authorized, in the City of Kirkland,
State of Washington, on the 28th day of March, 2000.
AVT CORPORATION
By: /s/ Richard J. LaPorte
--------------------------
Richard J. LaPorte
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities indicated below on the
28th day of March, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Richard J. LaPorte President, Chief Executive Officer and Chairman of the Board
----------------------------------- (Principal Executive Officer)
Richard J. LaPorte
/s/ Roger A. Fukai Executive Vice President and Chief Financial Officer (Principal
----------------------------------- Financial and Accounting Officer)
Roger A. Fukai
/s/ James S. Campbell Director
-----------------------------------
James S. Campbell
/s/ Robert L. Lovely Director
-----------------------------------
Robert L. Lovely
/s/ William L. True Director
-----------------------------------
William L. True
/s/ Robert F. Gilb Director
-----------------------------------
Robert F. Gilb
</TABLE>
52
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation of AVT Corporation (A) (Exhibit
3.1)
3.2 Amended and Restated Bylaws of AVT Corporation (A)(Exhibit 3.2)
4.1 Form of Warrant, dated January 3, 1997, issued by Applied Voice
Technology, Inc. to shareholders of Telcom Technologies, Inc. (E)
(Exhibit 4.1)
+10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
+10.2 Restated 1989 Stock Option Plan (F)
+10.3 1986 Incentive Stock Option Plan (A) (Exhibits 10.3)
+10.4 Management Incentive Compensation Plan (A) (Exhibit 10.4)
+10.5 Employment Agreement dated May 1, 1993 between Applied Voice
Technology, Inc. and Richard J. LaPorte (A) (Exhibit 10.5)
+10.6 Form of Indemnification Agreement between Applied Voice Technology
and each of its directors and officers (A) (Exhibit 10.6)
10.8 Lease Agreement dated June 30, 1989 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. as
amended (A) (Exhibit 10.11)
10.9 Second Amendment to Lease Agreement dated February 1, 1995
between Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (D) (Exhibit 10.11)
10.10 Third Amendment to Lease Agreement dated May 28, 1997 between
Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (G) (Exhibit 10.10)
10.11 Lease Agreement dated May 28, 1997 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. (G) Exhibit
10.11)
#10.12 Amended Patent License Agreement dated September 29, 1995 between
Syntellect Technology Corp. and Applied Voice, Technology Inc. (B)
(Exhibit 10.1)
10.13 Master Software Manufacturing License Agreemented dated June 11,
1992 between Intelligent Environments Inc. and Applied Voice
Technology, Inc. as amended (A) (Exhibit 10.16)
10.14 Agreement and Plan of Merger among Applied Voice Technology, Inc.,
Cracchiolo & Feder, Inc., the shareholders of Cracchiolo & Feder,
Inc. and CFI Acquisition Corp., dated as of January 2, 1996. (C)
(Exhibit 10.1)
10.15 Registration Rights Agreement among Applied Voice Technology,
Inc., Joseph J. Cracchiolo and Bradley H. Feder, dated as of
January 2, 1996 (C) (Exhibit 10.2)
10.16 Agreement and Plan of Merger among AVT Corporation, MediaTel
Corporation and Goldengate Acquisition Corp., dated as of April
13, 1999. (H) (Exhibit 10.1)
10.17 Registration Rights Agreement among AVT Corporation and the
shareholders of MediaTel Corporation, dated as of April 14,
1999.(H) (Exhibit 10.2)
10.18 Escrow Agreement and Indemnification Agreement among AVT
Corporation, Sanjeev Malaney, as Securityholder Agent, and
ChaseMellon Shareholder Services, LLC, as escrow agent, dated as
of April 14, 1999.(H) (Exhibit 10.3)
10.19 Employment Agreement dated April 14, 1999 between AVT Corporation
and David Sohm.
10.20 Loan Agreement and Promissory Note dated August 15, 1999 between
U.S. Bank of Washington and AVT Corporation
21.1 Subsidiaries of AVT Corporation
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of PriceWaterhouseCoopers LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for Year ended December 31, 1998.
27.3 Restated Financial Data Schedule for Year ended December 31, 1997.
27.4 Restated Financial Data Schedule for the three months ended March
31, 1999.
27.5 Restated Financial Data Schedule for the three months ended March
31, 1998.
_________________
(A) Previously filed with, and incorporated herein by reference to, designated
exhibits to Registration Statement on Form S-1 of Applied Voice Technology,
Inc. File No. 333-85452.
(B) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 2, 1996.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on Form 10-K.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 3, 1997.
(F) Previously filed with, and incorporated by reference to, appendix A to the
Company's definitive Proxy Statement dated April 16, 1996.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K.
(H) Previously filed with, and incorporated by reference to, designated exhibit
to the Company Current Report on Form 8-K/A dated April 14, 1999.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.
53
<PAGE>
Exhibit 10.19
DAVID SOHM
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
April 14, 1999 among AVT Corporation, a Washington corporation ("AVT"), MediaTel
Corporation, a Delaware corporation ("Employer"), and David Sohm ("Executive").
RECITALS
A. AVT, Employer, and Goldengate Acquisition Corp., a Delaware corporation
and wholly-owned subsidiary of AVT ("Merger Sub") have entered into a Merger
Agreement dated as of the date hereof (the "Merger Agreement"), pursuant to
which Merger Sub will merge with and into Employer with Employer surviving.
B. It is a condition precedent to the closing of the Merger Agreement that
Executive and Employer enter into this Agreement.
C. Based on Executive's success to date in developing and managing
Employer, Employer desires to retain the services of Executive, and Executive is
willing to provide services to Employer, upon the terms and subject to the
conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, Employer, AVT and Executive hereby agree as follows:
1. Employment
Employer will employ Executive, either directly or through AVT, and
Executive will accept employment by Employer as its President. Executive will
have the authority, subject to Employer's Articles of Incorporation and Bylaws,
as may be granted from time to time by Employer's Board of Directors. Executive
will have the policy and decision-making authority and responsibility, and will
perform the duties customarily performed by an executive officer of a
corporation that is, in all respects, similar to Employer. Executive will have
such other duties as may be assigned from time to time by Employer's or AVT's
Board of Directors that relate to the business of Employer, its subsidiaries
(including any partnerships, joint ventures, limited liability companies or
other business entities), AVT, its subsidiaries, or any business ventures
(including any partnerships, joint ventures, limited liability companies or
other
<PAGE>
business entities) in which Employer, its subsidiaries, AVT, or its subsidiaries
may participate.
2. Attention and Effort
Executive will devote all of the normal business time that is necessary and
appropriate, and his ability, attention and effort to Employer's business and
will skillfully serve its interests during the term of this Agreement; provided,
however, that Executive may devote reasonable periods of time to (a) engaging in
personal investment activities and (b) engaging in charitable or community
service activities, so long as neither of the foregoing additional activities
materially interferes with Executive's duties under this Agreement.
3. Term
Unless otherwise terminated pursuant to Section 6 hereof, Executive's term
of employment under this Agreement shall expire on April 14, 2001. Expiration of
the term of employment does not require termination of the employment
relationship.
4. Compensation
During the term of this Agreement, Employer agrees to pay or cause to be
paid to Executive, and Executive agrees to accept in exchange for the services
rendered hereunder by him, the following compensation:
4.1 Annual Base Salary
Executive's compensation shall consist, in part, of an annual base salary
which for calendar year 1999 shall be $200,000, before all customary payroll
deductions. Such annual base salary shall be paid in substantially equal
installments and at the same intervals as other employees of Employer are paid.
Employer's Board of Directors shall consider increases in the amount of such
annual base salary on not less than an annual basis, but may not reduce the
annual base salary.
4.2 Bonus
4.2.1 Objective Bonus
For the year ending December 31, 1999 and subsequent calendar years,
Executive will be entitled to receive, in addition to the annual base salary
described above, a bonus upon achievement of specified objectives submitted by
Executive and approved by the President of AVT (the "Objective Bonus"). The
Objective Bonus payable for 1999 shall be $25,000 and Executive shall submit his
proposed specified
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<PAGE>
objectives to the President of AVT on or before May 15, 1999. For Objective
Bonuses payable with respect to 2000 and succeeding calendar years the amount of
the bonus shall be agreed to by Executive and the President of AVT but it shall
in no event be less than $25,000 and Executive shall submit his proposed
specified objectives on or before March 15 of the calendar year to which the
Objective Bonus relates.
4.2.2 MICP Plan
For the year ending December 31, 1999, Executive will also be entitled to
receive the bonus described on Schedule A (the "MICP Bonus") under AVT's
Management Incentive Compensation Plan (the "MICP"), payable in accordance with
the terms set forth in Schedule A, if AVT and Employer achieve specified levels
of total operating profit (earnings before interest and tax) for such year;
provided, however, that such bonus shall be prorated in proportion to the number
- -------- -------
of full months that Executive is employed by Employer in 1999. Furthermore,
Executive shall be entitled to a bonus under the MICP for each calendar year
following 1999 calculated in the same manner as the MICP Bonus for 1999,
provided, however, that the MICP Bonus for any following year shall be based on
AVT's operating profit targets for AVT and Employer for such calendar year, and
provided further that the Target Bonus (as defined on Schedule A) shall not be
less than 25 percent of Executive's base salary for such year.
4.2.3 1999 Prorated MediaTel Bonus
In addition to the amount set forth in Section 4.2.2, Executive shall also
be paid such amounts, prorated as above from January 1, 1999 through April 30,
1999 and payable on or before June 30, 1999, to which he would have been
otherwise entitled for 1999 under Employer's 1999 Executive Officer's Incentive
Compensation Plan, a copy of which is attached as Exhibit B (the "MediaTel
MICP").
4.3 Stock Options
Executive is hereby awarded a nonqualified stock option to purchase 80,000
shares of AVT common stock (the "Options") with an exercise price equal to the
average of the high and low trading prices of AVT common stock on the date
hereof. Twenty-five percent of the Options will vest on the first anniversary of
the date hereof. Thereafter the Options will vest at a rate of 2.08333 percent
per month, and any remaining unvested options will vest in full on the fourth
anniversary of the date hereof The Options will be granted pursuant to, and will
be subject to the terms and conditions contained in, an option letter agreement
in the form attached hereto as Exhibit A, which option letter shall in turn be
granted pursuant to, and governed by the terms and conditions contained in,
AVT's 1989 Restated Stock Option Plan. In
-3-
<PAGE>
addition, Executive shall be eligible for participation in additional option
grants on an annual basis, or other periodic basis as determined by AVT for
other Executives, in a manner consistent with AVT's use of option grants for
other Executive officers of AVT and its subsidiaries.
5. Benefits
During the term of this Agreement, Executive will be entitled to
participate, subject to and in accordance with applicable eligibility
requirements, in fringe benefit programs generally available to employees of
Employer, as those programs may currently exist or be modified from time to
time. Executive will also be entitled to such other benefits as are or may be
available to executive level management of AVT.
6. Termination
Employment of Executive pursuant to this Agreement may be terminated as
follows, but in any case the provisions of Section 8 hereof shall survive the
termination of this Agreement and the termination of Executive's employment
hereunder.
6.1 By Employer
With or without Cause (as hereinafter defined), Employer may terminate
Executive's employment at any time during the term of employment upon giving
Notice of Termination (as hereinafter defined).
6.2 By Executive
Executive may terminate his employment at any time, with or without Good
Reason (as hereinafter defined), upon giving Notice of Termination.
6.3 Automatic Termination
This Agreement and Executive's employment hereunder will terminate
automatically upon Executive's death or total disability. The term "total
disability" as used herein means Executive's inability, with or without
reasonable accommodation, to perform the duties set forth in Section 1 hereof
for a period or periods aggregating 120 calendar days in any 12-month period as
a result of physical or mental illness, loss of legal capacity or any other
cause beyond Executive's control, unless Executive is granted a leave of absence
by Employer's Board of Directors. Executive and Employer hereby acknowledge that
Executive's ability to perform the duties specified in Section 1 hereof is of
the essence of this Agreement. Termination hereunder will be deemed to
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<PAGE>
be effective (a) at the end of the calendar month in which Executive's death
occurs, or (b) immediately upon a determination by Employer's Board of Directors
of Executive's total disability, as defined herein.
6.4 Notice
The term "Notice of Termination" means at least 14 days' written notice of
termination of Executive's employment, during which period Executive's
employment and performance of services will continue; provided, however, that
Employer may, upon notice to Executive and without reducing Executive's
compensation during such period, excuse Executive from any or all of his duties
during such period. The effective date of the termination of Executive's
employment hereunder shall be the date on which such 14-day period expires.
7. Termination Payments
In the event of termination of Executive's employment, all compensation and
benefits set forth in this Agreement will terminate, except as specifically
provided in this Section 7 or as provided under the Options.
7.1 Termination by Employer
(a) If Employer terminates Executive's employment without Cause prior to
the end of the term of this Agreement, Executive will be entitled to receive (i)
termination payments equal to the lesser of (aa) one year's annual base salary
and (bb) the annual base salary Executive would have received if his employment
hereunder had continued until the end of the term of this Agreement provided,
however, that in no event shall Executive receive less than three months' base
salary under this subsection (i), (ii) continued medical insurance for the
period of the salary continuation; (iii) any unpaid annual base salary that has
accrued for services already performed as of the date termination of Executive's
employment becomes effective and any unpaid amount that has accrued under
Section 4.2.3; and (iv) the Objective Bonus for the calendar year in which the
termination occurs, payable in accordance with its terms as if Executive were
still employed by Employer at the conclusion of such year. Executive will not be
entitled to receive any portion of the MICP Bonus for the year in which his
employment terminates.
(b) If Employer terminates Executive's employment with Cause, Executive
will not be entitled to receive any of the foregoing benefits, other than those
set forth in clause (iii) above.
-5-
<PAGE>
7.2 Termination by Executive
(a) If Executive terminates his employment for Good Reason prior to the end
of the term of this Agreement, Executive will be entitled to receive the
payments set forth in Section 7.1(a) hereof.
(b) If Executive terminates his employment for any reason other than Good
Reason prior to the end of the term of this Agreement, Executive will not be
entitled to any payments hereunder, other than those set forth in clause (iii)
of Section 7.1 (a) hereof.
7.3 Expiration of Term or Termination Because of Death or Total Disability
In the case of the termination of Executive's employment as a result of the
expiration of the term of this Agreement or because of his death or total
disability as defined above, Executive shall not be entitled to receive any
payments hereunder, other than those set forth in clause (iii) of Section 7.1
(a) hereof.
7.4 Payment Schedule
All payments under this Section 7 will be made to Executive at the same
interval as such payments would have been paid had Executive not terminated
employment hereunder.
7.5 Certain Definitions
(a) Wherever reference is made in this Agreement to termination being
with or without Cause, "Cause" means the occurrence of one or more of the
following events:
(i) Executive's willful material misconduct or dishonesty in
the performance of, or the willful failure to perform, any material duty under
this Agreement;
(ii) Executive's willful or intentional injury of Employer or
AVT, Executive's breach of fiduciary duty involving personal profit, or any act
of Executive involving moral turpitude adversely affecting the business,
goodwill or reputation of Employer or AVT;
(iii) Violation by Executive of a state or federal criminal law
involving the commission of a crime against Employer or AVT or any felony;
-6-
<PAGE>
(iv) Habitual or repeated misuse by Executive of alcohol or
controlled substances that materially impairs Executive's ability to perform his
duties under this Agreement; or
(v) Any material violation by Executive of any provision of
Section 8 of this Agreement.
Notwithstanding the foregoing, except in the case of subsection (a)(iii)
above, Executive shall not be deemed to have been terminated for Cause unless
and until Executive has been given notice and an opportunity to cure in
accordance with Section 10 hereof.
(b) Wherever reference is made in this Agreement to termination being
with or without "Good Reason," "Good Reason" means the occurrence of any of the
following without the consent of the Executive:
(i) the assignment to Executive of duties materially
inconsistent with and detrimental to, Executive's position, authority, duties or
responsibilities as contemplated by Section 1 hereof; provided, however, that
the reduction of Executive's position, authority, duties and responsibilities by
Employer following Executive's written notice to Employer that he intends to
resign his position with Employer without Good Reason shall not constitute "Good
Reason" under this Agreement;
(ii) Employer requiring the Executive to (aa) be based at any
office or location more than 15 miles from the current location in the San
Francisco, CA area, or (bb) spend materially more time traveling than is
customarily spent by Executive officers of comparable companies performing
similar functions; or
(iii) Any material violation by Employer of any provision of
this Agreement.
Notwithstanding the foregoing Executive shall not be deemed to have
terminated employment for Good Reason unless and until Employer has been given
notice and an opportunity to cure in accordance with Section 10 hereof.
(c) For purposes of Sections 7.5(a)(i) and (ii), no act, or omission
to act, on Executive's part shall be considered "willful" unless done, or
omitted to be done, by him not in good faith or without reasonable belief that
his action or omission was in the best interest of Employer and AVT; provided,
however, that any act, or omission to act, on Executive's part in reliance upon
an opinion of counsel to Employer or AVT or counsel to Executive shall not be
deemed to be willful.
-7-
<PAGE>
8. Noncompetition and Nonsolicitation
8.1 Applicability
This Section 8 will survive the termination of Executive's employment with
Employer or the expiration of the term of this Agreement. Executive agrees that
the duration and scope of his obligations under this Section 8 are reasonable.
8.2 Scope of Competition
Executive agrees that he will not, directly or indirectly, during his
employment and for a period (the "Noncompete Period") of (a) one year from the
date on which his employment is terminated if it is terminated prior to the
expiration of the term of this Agreement by Employer without Cause or by
Executive for Good Reason and (b) two years from the date on which his
employment is terminated if it is terminated prior to the expiration of the term
of this Agreement by Employer for Cause or by Executive without Good Reason be
employed by, consult with or otherwise perform services for, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of or be connected with, in any manner, any Competitor unless released
from such obligation in writing by Employer's Board of Directors.
Notwithstanding the foregoing, the Noncompete Period, if determined under clause
(a) above, shall extend beyond the expiration of the term of this Agreement and
only for the period of time that Executive is receiving severance benefits under
Section 7.1(a), and if determined under clause (b) above, shall not extend
beyond the third anniversary of the date of this Agreement. A "Competitor" means
any business entity that, as of termination of employment, provides services
that directly or indirectly compete with, or are marketed or intended to compete
with, the services offered or under development by Company (or, if Company is
operated as a division of AVT, such division), in each case within North
America, Europe, Asia or Japan. A Competitor does not include a firm, such as an
ISP or common carrier, that provides communication facilities that could be used
by Company's customers, provided, however, that such firm does not target the
market(s) served by Company. This Section 8.2 shall not restrict Executive from
working for a division or subsidiary of a larger company which division or
subsidiary is not on its own a "Competitor", even if other divisions or
subsidiaries of such a company are competitors, provided that AVT receives
adequate assurances as it may request that Executive has no involvement with the
divisions or subsidiaries engaged in business that compete with Company.
Executive shall be deemed to be related to or connected with a Competitor if
such Competitor is (a) a partnership in which he is a general or limited partner
or employee, (b) a corporation or association of which he is a shareholder,
officer, employee or director, or (c) a partnership corporation or association
of which he is a member,
-8-
<PAGE>
consultant or agent; provided, however, that nothing herein will prevent the
purchase or ownership by Executive of shares that constitute less than 5% of the
outstanding equity securities of a publicly held corporation, if Executive had
no other relationship with such corporation.
8.3 Scope of Nonsolicitation
Executive will not directly or indirectly solicit, influence or entice, or
attempt to solicit, influence or entice, any employee or consultant of Employer
to cease his or her relationship with Employer or solicit, influence, entice or
in any way divert any customer, distributor, partner, joint venturer or supplier
of Employer to do business or in any way become associated with any Competitor.
This Section 8.3 will apply during the time period and geographical area
described in Section 8.2 hereof.
8.4 Assignment of Intellectual Property
All concepts, designs, machines, devices, uses, processes, technology,
trade secrets, works of authorship, customer lists, plans, embodiments,
inventions, improvements or related work product (collectively, "Intellectual
Property") that Executive develops, conceives or first reduces to practice
during the term of his employment hereunder, whether working alone or with
others, shall be Employer's sole and exclusive property, together with any and
all Intellectual Property rights, including, without limitation, patent or
copyright rights, relating thereto, and Executive hereby assigns to Employer all
of such Intellectual Property. "Intellectual Property" shall include only such
concepts, designs, machines, devices, uses, processes, technology, trade
secrets, works of authorship, customer lists, plans, embodiments, inventions,
improvements and related work product that (a) relate to Executive's performance
of services under this Agreement, to Employer's field of business or to
Employer's actual or demonstrably anticipated research or development, whether
or not developed, conceived or first reduced to practice during normal business
hours or with the use of any equipment, supplies, facilities or trade secret
information or other resource of Employer, or (b) are developed in whole or in
part on Employer's time or developed using Employer's equipment, supplies,
facilities or trade secret information, or other resources of Employer, whether
or not the work product relates to Employer's field of business or Employer's
actual or demonstrably anticipated research.
8.5 Disclosure and Protection of Inventions
Executive shall disclose in writing all concepts, designs, processes,
technology, plans, embodiments, inventions or improvements constituting
Intellectual Property to Employer promptly after the development thereof. At
Employer's request and at
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<PAGE>
Employer's expense, Executive will assist Employer or its designee in efforts to
protect all rights relating to such Intellectual Property. Such assistance may
include, without limitation, the following: (a) making application in the United
States and in foreign countries for a patent or copyright on any work products
specified by Employer; (b) executing documents of assignment to Employer or its
designee of all of Executive's right, title and interest in and to any work
product and related intellectual property rights; and (c) taking such additional
action (including, without limitation, the execution and delivery of documents)
to perfect, evidence or vest in Employer or its designee all right, title and
interest in and to any Intellectual Property and any rights relating thereto.
8.6 Nondisclosure; Return of Materials
During the term of his employment by Employer and following termination of
such employment, Executive will not disclose (except as required by his duties
to Employer) any concept, design, process, technology, trade secret, customer
list, plan, embodiment or invention, any other Intellectual Property or any
other confidential information, whether patentable or not, of Employer of which
Executive becomes informed or aware during his employment, whether or not
developed by Executive. In the event of the termination of his employment with
Employer or the expiration of this Agreement, Executive will return all
documents, data and other materials of whatever nature, including, without
limitation, drawings, specifications, research, reports, embodiments, software
and manuals to Employer that pertain to his employment with Employer or to any
Intellectual Property and shall not retain or cause or allow any third party to
retain photocopies or other reproductions of the foregoing.
8.7 Equitable Relief
Executive acknowledges that the provisions of this Section 8 are essential
to Employer, that Employer would not enter into this Agreement if it did not
include this Section 8 and that damages sustained by Employer as a result of a
breach of this Section 8 cannot be adequately remedied by damages, and Executive
agrees that Employer, notwithstanding any other provision of this Agreement,
including, without limitation, Section 14 hereof, in addition to any other
remedy it may have under this Agreement or at law, will be entitled to
injunctive and other equitable relief to prevent or curtail any breach of any
provision of this Agreement, including, without limitation, this Section 8. The
prevailing party in any proceedings under this Section 8 will be entitled to
recover costs and expenses, including attorneys' fees.
-10-
<PAGE>
8.8 Effect of Violation
Executive and Employer acknowledge and agree that additional consideration
has been given for Executive's entering into this Section 8, such additional
consideration including, without limitation, certain provisions for termination
payments pursuant to Section 7 hereof. Violation by Executive of this Section 8
will relieve Employer of any obligation it may have to make such termination
payments, but shall not relieve Executive of his obligations, as required
hereunder, not to compete.
9. Representations and Warranties
To induce Employer to enter into this Agreement, Executive represents and
warrants to Employer as follows:
9.1 Qualification
Executive is qualified and capable, with or without reasonable
accommodation, of performing all the essential functions of his position under
this Agreement and of fulfilling his obligations hereunder. Executive agrees, if
Employer requests, to submit to annual medical examinations, to be paid for by
Employer.
9.2 No Violation of Other Agreements
Neither the execution nor the performance of this Agreement by Executive
will violate or conflict in any way with any other agreement by which Executive
may be bound, or with any other duties imposed on Executive by corporate or
other statutory or common law.
9.3 Inventions
Executive has prepared and attached hereto as Schedule B a list of all
inventions, patent applications and patents made or conceived by Executive prior
to the date hereof that are subject to prior agreement or that Executive desires
to exclude from this Agreement, or, if no such list is attached, Executive
hereby represents and warrants to Employer that there are no such inventions,
patent applications or patents.
10. Notice and Cure of Breach
Whenever a breach of this Agreement by either party is relied upon as
justification for any action taken by the other party pursuant to any provision
of this Agreement, other than pursuant to the definition of "Cause" set forth in
Section 7.5(a)(iii) hereof, before such action is taken, the party asserting the
breach of
-11-
<PAGE>
this Agreement shall give the other party at least 14 days' prior written notice
of the existence and nature of such breach before taking further action
hereunder and shall give the party purportedly in breach of this Agreement the
opportunity to correct such breach during the 14-day period.
11. Notices
Any notice or request required or permitted to be given hereunder must be
in writing given by personal delivery, overnight courier, certified or
registered mail or facsimile, addressed as respectively set forth below or to
such other address as any party has previously designated by such a notice. The
effective date of any notice or request is (a) three days from the date it is
sent by certified or registered mail so long as it is in fact received within
five days, (b) the date of delivery if personally delivered or sent by overnight
courier, or (c) when sent by facsimile with receipt confirmed.
Notices to Executive and Employer shall be sent as follows:
If to Executive:
David Sohm
MediaTel Corporation
274 Brannan Street, 6th Floor
San Francisco, CA 94107
If to Employer:
AVT Corporation
11410 N.E. 122nd Way
Kirkland, WA 98034-6927
Fax: (206) 820-4025
Attention: Chief Financial Officer
with a copy to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, WA 98101 -3099
Fax: (206) 583-8500
Attention: Linda A. Schoemaker
-12-
<PAGE>
12. Assignment
This Agreement is personal to Executive and shall not be assignable by
Executive. Employer may assign its rights and obligations hereunder to (a) any
corporation resulting from any merger, consolidation or other reorganization to
which Employer or AVT is a party, or (b) any corporation, partnership,
association or other person to which Employer or AVT may transfer all or
substantially all the assets and business of Employer or AVT existing at such
time. All the terms and provisions of this Agreement shall be binding on and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
13. Waivers
No delay or failure by any party hereto in exercising, protecting or
enforcing any of its rights, titles, interests or remedies hereunder, and no
course of dealing or performance with respect thereto, will constitute a waiver
thereof. The express waiver by a party hereto of any right, title, interest or
remedy in a particular instance or circumstance will not constitute a waiver
thereof in any other instance or circumstance. All rights and remedies shall be
cumulative and not exclusive of any other rights or remedies.
14. Arbitration
With the exception of proceedings by Employer to enforce its rights under
Section 8 hereof, any controversies or claims arising out of or relating to this
Agreement shall be fully and finally settled by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association then in
effect (the "AAA Rules"), conducted in San Francisco County, California, by one
arbitrator either mutually agreed upon by Employer and Executive or chosen in
accordance with the AAA Rules, except that the parties thereto shall have any
right to discovery as would be permitted by the Federal Rules of Civil Procedure
for a period of 90 days following the commencement of such arbitration
proceedings and the arbitrator thereof shall resolve any dispute that arises in
connection with such discovery. The prevailing party shall be entitled to costs
and expenses, including attorneys' fees, and judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof.
15. Amendments in Writing
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, will be effective unless the same is in writing, specifically
identifying this
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<PAGE>
Agreement and the provision intended to be amended, modified, waived, terminated
or discharged and signed by Employer and Executive, and each such amendment,
modification, waiver, termination or discharge will be effective only in the
specific instance and for the specific purpose for which given. No provision of
this Agreement will be varied, contradicted or explained by any oral agreement,
course of dealing or performance or any other matter not set forth in an
agreement in writing and signed by Employer and Executive.
16. Governing Law
This Agreement will be governed by and construed and enforced in accordance
with the internal laws of the State of Washington, without regard to any rules
governing conflicts of laws.
17. Severability
If any provision of this Agreement is held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof will remain in full force and
effect in such jurisdiction and will be liberally construed in order to carry
out the intent of the parties hereto as nearly as may be possible, (b) such
invalidity, illegality or unenforceability will not affect the validity,
legality or enforceability of any other provision hereof, and (c) such provision
shall be deemed reformed to the minimum extent determined necessary by the court
or arbitrator having jurisdiction thereover in order for such provision to be
enforceable under applicable law.
18. Headings
All headings used herein are for convenience only and will not in any way
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
19. Counterparts
This Agreement, and any amendment or modification entered into pursuant to
Section 15 hereof, may be executed in any number of counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.
-14-
<PAGE>
20. Entire Agreement
This Agreement on and as of the date hereof constitutes the entire
agreement between Employer and Executive with respect to the subject matter
hereof and all prior or contemporaneous oral or-written communications,
understandings or agreements between Employer and Executive with respect to such
subject matter are hereby superseded and nullified in their entireties, except
that (i) Executive shall be entitled to the $100,000 "Change of Control" payment
with respect to the Merger (but not any subsequent Change of Control) described
in that letter from Employer to Executive dated October 29, 1998, (ii) except as
specifically provided in Section 4.2.3 with respect to the MediaTel MICP, and
(iii) Executive's MediaTel Corporation stock options (including the provisions
regarding acceleration in certain circumstances) shall remain in force, as
assumed by AVT in the Merger.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EMPLOYEE
/s/ David Sohm
--------------------------------------
David Sohm
MEDIATEL CORPORATION
By /s/ Richard J. LaPorte
------------------------------------
Its___________________________________
AVT CORPORATION
By /s/ Richard J. LaPorte
------------------------------------
Its___________________________________
-15-
<PAGE>
EXHIBIT 10.20
[LOGO OF US BANK]
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$4,000,000.00 08-15-1999 08-15-20001 733/18 0/10 0340178007 CMB65
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER: AVT CORPORATION Lender: U.S. Bank National Association
11410 NE 122ND WAY South Seattle Corporation Banking
KIRKLAND, WA 98083 1420 Fifth Avenue
Seattle, WA 98101
================================================================================
THIS BUSINESS LOAN AGREEMENT between AVT CORPORATION ("Borrower") and
UcriderFinancial Printing GroupTHIS BUSINESS LOAN AGREEMENT between AVT
CORPORATION ("Borrower") and U.S. Bank National Association ("Lender") is
made and executed on the following terms and conditions. Borrower has
received prior commercial loans from Lender or has applied to Lender for a
commercial loan or loans and other financial accommodations, Including
those which may be described on any exhibit or schedule attached to this
Agreement. All such loans and financial accommodations, together with all
future loans and financial accommodations from Lender to Borrower, are
referred to In this Agreement Individually as the "Loan" and collectively
as the "Loans." Borrower understands and agrees that: (a) In granting,
renewing, or extending any Loan, Lender Is relying upon Borrower's
representations, warranties, and agreements, as set forth in this
Agreement; (b) the granting, renewing, or extending of any Loan by Lender
at all times shall be subject to Lender's sole Judgment and discretion; and
(c) all such Loans shall be and shall remain subject to the following terms
and conditions of this Agreement.
TERM. This Agreement shall be effective as of August 15, 1999, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement shall
have the meanings attributed to such terms in the Uniform Commercial Code.
All references to dollar amounts shall mean amounts in lawful money of the
United States of America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
Borrower. The word "Borrower" means AVT CORPORATION. The word
"Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for
a Loan, whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien
or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become
barred by any statute of limitations; and whether such Indebtedness
may be or hereafter may become otherwise unenforceable.
Lender. The word "Lender" means U.S. Bank National Association, Its
successors and assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; (c) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations which are not
yet delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract,
lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold Improvements)
less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the
initial Loan Advance and each subsequent Loan Advance under this Agreement
shall be subject to the fulfillment to Lender's satisfaction of all of the
conditions set forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel.
<PAGE>
08-15-1999 BUSINESS LOAN AGREEMENT Page 2
Loan No 733/18 (Continued)
================================================================================
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Washington
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 11410 NE 122ND WAY, KIRKLAND, WA 98083. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
<PAGE>
08-15-1999 BUSINESS LOAN AGREEMENT Page 3
Loan No 733/18 (Continued)
================================================================================
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less
than $50,000,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 0.50 to 1.00.
Working Capital. Maintain Working Capital in excess of $10,000,000.00.
The following provisions shall apply for purposes of determining compliance
with the foregoing financial covenants and ratios: Compliance with all
covenants and ratios shall be determined by calculating the ratios/amounts
as of the end of each quarter. Covenants from acquisition will govern all
credit facilities unless cancelled. If acquisition facility Is not funded
and Is cancelled, then the above covenants will apply. Except as provided
above, all computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loons, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation; compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
NOT REQUIRED and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Cede of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loon to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loon proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loon; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loon with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
<PAGE>
08-15-1999 BUSINESS LOAN AGREEMENT Page 4
Loan No 733/18 (Continued)
================================================================================
YEAR 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that is,
that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform date-
sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower agrees
that this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or Note
or delivers any information to Lender. Borrower will promptly deliver to Lender
such information relating to this representation as Lender requests from time to
time.
DISCLOSURE. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.
REPORTING REQUIREMENTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, they will furnish to Lender the following;.
(1) As soon as available, but in no event later than ninety (90) days after the
end of each year, Form 10K CPA audited financial statement for such yearly
period.
(2) As soon as available, but in no event later than sixty (60) days after the
end of each quarter, Form 10Q for such quarterly period.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts,
and, at Lender's option, to administratively freeze all such accounts to allow
Lender to protect Lender's charge and setoff rights provided on this paragraph.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default In Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness.
Change In Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender In the State of Washington. If there Is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
County, the State of Washington. Subject to the provisions on arbitration,
this Agreement shall be governed by and construed In accordance with the
laws of the State of Washington.
Arbitration. Lender and Borrower agree that all disputes, claims and
controversies between them, whether Individual, Joint, or class In nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sate or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and
<PAGE>
08-15-1999 BUSINESS LOAN AGREEMENT Page 5
Loan No 733/18 (Continued)
================================================================================
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and deliver
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
AUGUST 15, 1999.
BORROWER:
AVT CORPORATION
By: /s/ Roger A. Fukai Executive V.P. & CFO
------------------------------------------
AUTHORIZED OFFICER TITLE
LENDER:
U.S. Bank National Association
By:____________________________________________
Authorized Officer
================================================================================
<PAGE>
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$4,000,000.00 Dated as of: AUGUST 15, 1999
- ------------- ---------------
AVT CORPORATION ("Borrower")
- -------------------------------------------------------------------
U.S. BANK NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
[_] single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
[X] revolving line of credit. No Advances shall be made which create a maximum
amount outstanding at any one time which exceeds the maximum amount shown
in Section 2. However, Advances hereunder may be borrowed, repaid and
reborrowed, and the aggregate Advances loaned hereunder from time to time
may exceed such maximum amount.
[_] non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not exceed
$4,000,000.00.
- -------------
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or
order at 555 SW OAK, PL-7, PORTLAND, OR 97204, the Principal Balance of this
------------------------------------
note, with interest thereon at the rate(s) specified in Sections 4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding may
vary from time to time pursuant to the provisions of this note. Subject to the
provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; provided, however, that once
--------
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall be irrevocable. The rate options are
the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as defined herein.
(a) Definitions. The following terms shall have the following meanings:
"Business Day'' means any day other than a Saturday, Sunday, or
other day that commercial banks in Portland, Oregon or New York City are
authorized or required by law to close; provided, however that when used in
connection with a LIBOR Rate, LIBOR Amount or LIBOR interest Period such term
shall also exclude any day on which dealings in U.S. dollar deposits are not
carried on in the London interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR Interest
Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period of 1,
--
2, 3 and 6 months commencing on the date the LIBOR Borrowing Rate becomes
- ----------
applicable thereto; provided, however, that: (i) the first day of each LIBOR
--------
Interest Period must be a Business Day; (ii) no LIBOR Interest Period shall be
selected which would extend beyond August 15, 2001 ; (iii) no LIBOR Interest
---------------
Period shall extend beyond the date of any principal payment required under
Section 6 of this note, unless the sum of the Prime Rate Amount, plus LIBOR
Amounts with LIBOR Interest Periods ending on or before the scheduled date of
such principal payment, plus principal amounts remaining unborrowed under a line
of credit, equals or exceeds the amount of such principal payment; (iv) any
LIBOR Interest Period which would otherwise expire on a day which is not a
Business Day, shall be extended to the next succeeding Business Day, unless the
result of such extension would be to extend such LIBOR Interest Period into
another calendar month, in which event the LIBOR Interest Period shall end on
the immediately preceding Business Day; and (v) any LIBOR Interest Period that
begins on the last Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at the end of such
LIBOR Interest Period) shall end on the last Business Day of a calendar month.
"LIBOR Rate" means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender as
its LIBOR Rate, based on Lender's determination, on the basis of such factors as
Lender deems relevant, of the rate of interest at which U.S. dollar deposits
would be offered to U.S. Bank National Association in the London interbank
market at approximately 11 a.m. London time on the date which is two Business
Days prior to the first day of such LIBOR Interest Period for delivery on the
first day of such LIBOR Interest Period for the number of months therein;
provided, however, that the LIBOR Rate shall be adjusted to take into account
the maximum reserves required to be maintained for Eurocurrency liabilities by
banks during each such LIBOR Interest Period as specified in Regulation D of the
Board of Governors of the Federal Reserve System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time to
time establishes as its prime rate and is not, for example, the lowest rate of
interest which Lender collects from any borrower or class of borrowers. When the
Prime Rate is applicable under Section 4(b) or 11 (b), the interest rate
hereunder shall be adjusted without notice effective on the day the Prime Rate
changes, but in no event shall the rate of interest be higher than allowed by
law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) The Prime Borrowing Rate.
(i) The Prime Borrowing Rate is a per annum rate equal to the Prime Rate
plus 0.000 % per annum.
-------
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested effective date
(which must be a Business Day) and principal amount of the Advance or increase
in the Prime Rate Amount, and whether Borrower is requesting a new Advance under
a line of credit or conversion of a LIBOR Amount to the Prime Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the LIBOR Borrowing Rate is in effect.
(c) The LIBOR Borrowing Rate.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 1.500% per annum.
------
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender between
8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day. Borrower
may request an Advance, conversion of any portion of the Prime Rate Amount to a
LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR Amount, at
such rate only by giving Lender notice in accordance with Section 4 (c) (iii)
before 10:00 a.m. (Portland, Oregon time) on such day.
(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally and
promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m. (Portland,
Oregon time) two (2) Business Days prior to the desired effective date of such
Page 1 of 4
<PAGE>
rate. Any oral notice shall be given by, and any written notice or confirmation
of an oral notice shall be signed by, the person(s) authorized in Section 15 of
this note, and shall specify the requested effective date of the rate, LIBOR
Interest Period and LIBOR Amount, and whether Borrower is requesting a new
Advance at the LIBOR Borrowing Rate under a line of credit, conversion of all or
any portion of the Prime Rate Amount to a LIBOR Amount, or a new LIBOR Interest
Period for an outstanding LIBOR Amount. Notwithstanding any other term of this
note, Borrower may elect the LIBOR Borrowing Rate in the minimum principal
amount of $100,000.00 and in multiples of any amount above such amount;
----------- ----------
provided, however, that no more than forty separate LIBOR Interest Periods may
- -------- -----
be in effect at any one time.
(iv) If at any time the LIBOR Rate is unascertainable or unavailable to
Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR
Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is then
in effect, (A) it shall terminate automatically with respect to all LIBOR
Amounts (i) on the last day of each then applicable LIBOR Interest Period, if
Lender may lawfully continue to maintain such loans, or (ii) immediately if
Lender may not lawfully continue to maintain such loans through such day, and
(B) subject to Section 11, the Prime Borrowing Rate automatically shall become
effective as to such amounts upon such termination.
(v) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change the basis of taxation of payments
to Lender with respect to any loans bearing interest based on the LIBOR Rate, or
(ii) shall impose or modify any reserve, insurance, special deposit, or similar
requirements against assets of, deposits with or for the account of, or credit
extended by Lender or its Eurodollar lending office, or impose on Lender or its
Eurodollar lending office any other condition affecting any such loans, and (B)
the result of any of the foregoing is (i) to increase the cost to Lender of
making or maintaining any such loans or (ii) to reduce the amount of any sum
receivable under this note by Lender or its Eurodollar lending office, Borrower
shall pay Lender within 15 days after demand by Lender such additional amount as
will compensate Lender for such increased cost or reduction. The determination
hereunder by Lender of such additional amount shall be conclusive in the absence
of manifest error. If Lender demands compensation under this Section 4(c)(v),
Borrower may upon three (3) Business Days' notice to Lender pay the accrued
interest on all LIBOR Amounts, together with any additional amounts payable
under Section 4(c)(vi). Subject to Section 11, upon Borrower's paying such
accrued interest and additional costs, the Prime Borrowing Rate immediately
shall be effective with respect to the unpaid principal balance of such LIBOR
Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR Amount
had been funded in the London interbank market) is necessary to compensate
Lender for any direct or indirect losses, expenses, liabilities, costs, expenses
or reductions in yield to Lender, whether incurred in connection with
liquidation or re-employment of funds or otherwise, incurred or sustained by
Lender as a result of: (A) Any payment or prepayment of a LIBOR Amount,
termination of the LIBOR Borrowing Rate or conversion of a LIBOR Amount to the
Prime Borrowing Rate on a day other than the last day of the applicable LIBOR
Interest Period (including as a result of acceleration or a notice pursuant to
Section 4(c)(v)); or (B) Any failure of Borrower to borrow, continue or prepay
any LIBOR Amount or to convert any portion of the Prime Rate Amount to a LIBOR
Amount after Borrower has given a notice thereof to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London interbank market. Lender's determination of
the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive in
the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will
be computed at the applicable rate based on a 360-day year and applied to the
actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) Principal. Principal shall be paid:
[_] on demand.
[X] on demand, or if no demand, on August 15, 2001.
---------------
[_] on ____.
[_] subject to Section 8, in installments of
[_] ____ each, plus accrued interest, beginning on ____ and on
the same day of each ____ thereafter until ____ when the
entire Principal Balance plus interest thereon shall be due
and payable.
[_] ____ each, including accrued interest, beginning on ____ and
on the same day of each ____ thereafter until ____ when the
entire Principal Balance plus interest thereon shall be due
and payable.
[_] ____
(b) Interest.
(i) Interest on the Prime Rate Amount shall be paid:
[X] on the 15th day of September, 1999 and on the same day of
---- ---------------
each month, thereafter prior to maturity and at maturity.
-----
[_] at maturity.
[_] at the time each principal installment is due and at
maturity.
[_] ____.
(ii) Interest on all LIBOR Amounts shall be paid:
[_] on the last day of the applicable LIBOR Interest Period, and
if such LIBOR Interest Period is longer than three months,
on the last day of each three month period occurring during
such LIBOR Interest Period, and at maturity.
[X] on the 15th day of September, 1999 and on the same day of
---- ---------------
each month thereafter prior to maturity and at maturity.
-----
[_] at maturity.
[_] at the time each principal installment is due and at
maturity.
[_] ____.
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at any
time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not prepay
all or any part of any LIBOR Amount or terminate any LIBOR Borrowing Rate,
except on the last day of the applicable LIBOR Interest Period.
(c) Principal prepayments will not postpone the date of or change the amount of
any regularly scheduled payment. At the time of any principal prepayment,
all accrued interest, fees, costs and expenses shall also be paid.
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note changes
the holder of this note may, from time to time, in holder's sole discretion,
increase or decrease the amount of each of the installments remaining unpaid at
the time of such change in rate to an amount holder in its sole discretion deems
necessary to continue amortizing the Principal Balance at the same rate
established by the installment amounts specified in Section 6(a),
Page 2 of 3
<PAGE>
whether or not a "balloon" payment may also be due upon maturity of this note.
Holder shall notify the undersigned of each such change in writing. Whether or
not the installment amount is increased under this Section 8, Borrower
understands that, as a result of increases in the rate of interest the final
payment due, whether or not a "balloon" payment, shall include the entire
Principal Balance and interest thereon then outstanding, and may be
substantially more than the installment specified in Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in
any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of that
month.
10. PAYMENT BY AUTOMATIC DEBIT.
[_] Borrower hereby authorizes Lender to automatically deduct the amount of all
principal and interest payments from account number ____. If there are
insufficient funds in the account to pay the automatic deduction in full, Lender
may allow the account to become overdrawn, or Lender may reverse the automatic
deduction. Borrower will pay all the fees on the account which result from the
automatic deductions, including any overdraft and non-sufficient funds charges.
If for any reason Lender does not charge the account for a payment, or if an
automatic payment is reversed, the payment is still due according to this note.
If the account is a Money Market Account, the number of withdrawals from that
account is limited as set out in the account agreement. Lender may cancel the
automatic deduction at any time in its discretion.
Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic debit.
11. DEFAULT.
(a) Without prejudice to any right of Lender to require payment on demand or to
decline to make any requested Advance, each of the following shall be an event
of default: (i) Borrower fails to make any payment when due. (ii) Borrower fails
to perform or comply with any term, covenant or obligation in this note or any
agreement related to this note, or in any other agreement or loan Borrower has
with Lender. (iii) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this note or perform
Borrower's obligations under this note or any related documents. (iv) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (v) Borrower dies, becomes insolvent, liquidates
or dissolves, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender. (vii) Any of the events described in
this default section occurs with respect to any general partner in Borrower or
any guarantor of this note, or any guaranty of Borrower's indebtedness to Lender
ceases to be, or is asserted not to be, in full force and effect. (viii) There
is any material adverse change in the financial condition or management of
Borrower or Lender in good faith deems itself insecure with respect to the
payment or performance of Borrower's obligations to Lender. If this note is
payable on demand, the inclusion of specific events of default shall not
prejudice Lender's right to require payment on demand or to decline to make any
requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand, upon
the occurrence of an event of default, Lender may declare the entire unpaid
Principal Balance on this note and all accrued unpaid interest immediately due
and payable, without notice. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the interest rate on this note to a rate equal to the Prime Borrowing
Rate plus 5%. The interest rate will not exceed the maximum rate permitted by
applicable law. in addition, if any payment of principal or interest is 19 or
more days past due, Borrower will be charged a late charge of 5% of the
delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall,
at any time, be conclusive evidence of the unpaid Principal Balance and interest
owing on this note. Notwithstanding any other provisions of this note, in the
event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is
a revolving line of credit or a non-revolving line of credit, Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Advances under this Note, may be requested orally or in writing by Borrower
or by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. Borrower agrees to be liable for all sums
either: (a) advanced in accordance with the e instructions of an authorized
person or (b) credited to any of Borrower's accounts with Lender. The unpaid
principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs.
(b) All Advances shall be disbursed by deposit directly to Borrower's account
number , or by cashier's check issued to Borrower.
(c) Borrower agrees that Lender shall have no obligation to verify the identity
of any person making any request pursuant to this Section 15, and Borrower
assumes all risks of the validity and authorization of such requests. In
consideration of Lender agreeing, at its sole discretion, to make Advances upon
such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by a
person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not limited
to, financial statements, tax returns, lists of assets and liabilities, agings
of receivables and payables, inventory schedules, budgets and forecasts. If upon
review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid
and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as attorney
fees, including without limitation, costs and attorney fees incurred in any
appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or
otherwise, waives diligence, demand, presentment for payment, notice of non-
payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at any time is liable for, or
provides any real or personal property collateral for, any indebtedness of
Borrower to Lender, including the indebtedness evidenced by this note. Without
limiting the foregoing, Lender may, in its sole discretion: (a) make secured or
unsecured loans to Borrower and agree to any number of waivers, modifications,
extensions and renewals of any length of such loans, including the loan
evidenced by this note; (b) impair, release (with or without substitution of new
collateral), fail to perfect a security interest in, fail to preserve the value
of, fail to dispose of in accordance with applicable law, any collateral
provided by any person; (c) sue, fail to sue, agree not to sue, release, and
settle or compromise with, any person.
Page 3 of 3
<PAGE>
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers
are joint and several and are binding upon any marital community of which any of
the undersigned are members. Holder's rights and remedies under this note shall
be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a court
of competent jurisdiction to be illegal, invalid or unenforceable for any reason
whatsoever, such illegality, invalidity or unenforceability shall not affect the
balance of the terms and provisions hereof, which terms and provisions shall
remain binding and enforceable, and this note shall be construed as if such
illegal, invalid or unenforceable provision had not been contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is void
if the Loan, at the time of the proposed submission to arbitration, is secured
by real property located outside of Oregon or Washington, or if the effect of
the arbitration procedure (as opposed to any Claims of Borrower) would be to
materially impair Lender's ability to realize on any collateral securing the
Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Washington State Bar members in good standing. All arbitration hearings
will be held in Seattle, Washington. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-
judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and enforced in
accordance with the laws of the State of Washington without regard to conflicts
of law principles; provided, however, that to the extent that Lender has greater
--------
rights or remedies under Federal law, this provision shall not be deemed to
deprive Lender of such rights and remedies as may be available under Federal
law.
24. DISCLOSURE.
Oral agreements or oral commitments to loan money, extend credit, or to forebear
- --------------------------------------------------------------------------------
from enforcing repayment of a debt are not enforceable under Washington law.
- ---------------------------------------------------------------------------
25. RENEWAL AND EXTENSION. This Note is given in renewal and extension and not
in novation of the following described indebtedness: That certain Promissory
Note dated May 16, 1997, in the amount of $ 4,000,000.00 executed by Borrower
payable to Lender. It is further agreed that all liens and security interest
securing said indebtedness are hereby renewed and extended to secure the Note
and all renewals, extensions and modifications thereof.
26. Year 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that is,
that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform date-
sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower agrees
that this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or Note
or delivers any information to Lender. Borrower will promptly deliver to Lender
such information relating to this representation as Lender requests from time to
time.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.
AVT CORPORATION
- ----------------------------------------------------------
Borrower Name (Corporation Partnership or other Entity)
/s/ Roger A. Fukai Exec. V.P. & CFO
- ----------------------------------------------------------
By: AUTHORIZED OFFICER Title:
================================================================================
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank National Association
-------------------------------------
By:_______________________________________________
Title:____________________________________________
Date:_____________________________________________
Page 2 of 2
<PAGE>
Exhibit 21.1
Subsidiaries of AVT Corporation
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
AVT International, Inc. Washington
AVT Foreign Sales Corporation Barbados
RightFAX, Inc. Washington
MediaTel Corporation Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
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
Form S-8 Registration Statements, File Nos. 33-92438, 333-42279, 333-71623, 333-
11129, 333-77357, 333-78559 and 333-80053.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 28, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-92438, 333-42279, 333-71623, 333-11129,
333-77357, 333-78559 and 333-80053) of AVT Corporation of our report dated
February 19, 1999 relating to the financial statements of MediaTel Corporation
which appears in this form 10-K.
/s/ PriceWaterhouseCoopers LLP
San Francisco, California
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31, 1999 and the Consolidated
Statements of Income for the year Ended December 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 23,923
<SECURITIES> 51,095
<RECEIVABLES> 21,407
<ALLOWANCES> 1,104
<INVENTORY> 5,319
<CURRENT-ASSETS> 105,729
<PP&E> 19,793
<DEPRECIATION> 13,163
<TOTAL-ASSETS> 121,709
<CURRENT-LIABILITIES> 19,504
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 55,811
<TOTAL-LIABILITY-AND-EQUITY> 121,709
<SALES> 130,224
<TOTAL-REVENUES> 130,224
<CGS> 44,958
<TOTAL-COSTS> 44,958
<OTHER-EXPENSES> 57,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,411
<INCOME-TAX> 11,556
<INCOME-CONTINUING> 17,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,855
<EPS-BASIC> 1.20
<EPS-DILUTED> 1.12
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31, 1998 and the Consolidated
Statements of Income for the year ended December 31, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,466
<SECURITIES> 28,225
<RECEIVABLES> 18,492
<ALLOWANCES> 929
<INVENTORY> 5,560
<CURRENT-ASSETS> 68,811
<PP&E> 15,633
<DEPRECIATION> 10,216
<TOTAL-ASSETS> 85,648
<CURRENT-LIABILITIES> 14,562
<BONDS> 0
0
0
<COMMON> 43,129
<OTHER-SE> 27,957
<TOTAL-LIABILITY-AND-EQUITY> 85,648
<SALES> 102,977
<TOTAL-REVENUES> 102,977
<CGS> 37,282
<TOTAL-COSTS> 37,282
<OTHER-EXPENSES> 44,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,157
<INCOME-TAX> 8,078
<INCOME-CONTINUING> 14,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,079
<EPS-BASIC> 1.03
<EPS-DILUTED> 0.94
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31, 1997 and the Consolidated
Statements of Income for the Year ended December 31, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,164
<SECURITIES> 14,268
<RECEIVABLES> 13,817
<ALLOWANCES> 909
<INVENTORY> 4,908
<CURRENT-ASSETS> 45,566
<PP&E> 12,121
<DEPRECIATION> 7,823
<TOTAL-ASSETS> 62,686
<CURRENT-LIABILITIES> 13,823
<BONDS> 0
0
0
<COMMON> 34,319
<OTHER-SE> 14,052
<TOTAL-LIABILITY-AND-EQUITY> 62,686
<SALES> 76,971
<TOTAL-REVENUES> 76,971
<CGS> 29,233
<TOTAL-COSTS> 29,233
<OTHER-EXPENSES> 45,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,789
<INCOME-TAX> 1,470
<INCOME-CONTINUING> 2,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,319
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.16
</TABLE>
<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 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<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> 18,739
<SECURITIES> 33,369
<RECEIVABLES> 17,345
<ALLOWANCES> 0
<INVENTORY> 5,565
<CURRENT-ASSETS> 78,563
<PP&E> 5,733
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,224
<CURRENT-LIABILITIES> 15,150
<BONDS> 0
0
0
<COMMON> 48,247
<OTHER-SE> 31,827
<TOTAL-LIABILITY-AND-EQUITY> 95,224
<SALES> 28,843
<TOTAL-REVENUES> 28,843
<CGS> 10,174
<TOTAL-COSTS> 10,174
<OTHER-EXPENSES> 12,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,198
<INCOME-TAX> 2,256
<INCOME-CONTINUING> 3,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,942
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and the
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,973
<SECURITIES> 19,009
<RECEIVABLES> 12,578
<ALLOWANCES> 0
<INVENTORY> 4,365
<CURRENT-ASSETS> 49,463
<PP&E> 4,654
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,518
<CURRENT-LIABILITIES> 13,399
<BONDS> 0
0
0
<COMMON> 36,177
<OTHER-SE> 16,450
<TOTAL-LIABILITY-AND-EQUITY> 66,518
<SALES> 22,313
<TOTAL-REVENUES> 22,313
<CGS> 8,523
<TOTAL-COSTS> 8,523
<OTHER-EXPENSES> 10,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,806
<INCOME-TAX> 1,401
<INCOME-CONTINUING> 2,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,405
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.16
</TABLE>
