AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 2003
REGISTRATION NO. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AVATECH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7372 84-1035353
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
11403A Cronhill Drive
Owings Mills, Maryland 21117
(410) 902-6900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
DONALD ("SCOTTY") WALSH
CHIEF EXECUTIVE OFFICER
11403A CRONHILL DRIVE
OWINGS MILLS, MARYLAND 21117
(410) 902-6900
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPY TO:
Christopher Olander
Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.
One South Street
27th Floor
Baltimore, Maryland 21202
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1) COMMON SHARE (2) PRICE (3) REGISTRATION FEE
common stock, $0.01 par 2,320,247 1.25 2,900,308 $ 234.63
value per share
(1) 1,120,247 shares are being offered for resale by selling shareholders of the
registrant, 1,000,000 shares are issuable in merger and acquisition transactions
in which registrant may engage in the future, and 200,000 shares are issuable
under registrant's Restricted Stock Award Plan.
(2) Estimated solely for purposes of calculating the registration fee under Rule
457(c) and (g) under the Securities Act of 1933. The proposed maximum offering
price per share is based on the last sale price of $1.25 per share of
registrant's common stock reported on the OTC Bulletin Board on March 17, 2003.
(3) Of this amount, $1,400,308 relates to shares that may be offered for resale
by selling shareholders of the registrant, $1,250,000 relates to shares that may
be issued by the registrant in connection with merger and acquisition
transactions, and $250,000 relates to shares that registrant may issue under its
Restricted Stock Award Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
SUBJECT TO COMPLETION, DATED MARCH 26, 2003.
PROSPECTUS
AVATECH SOLUTIONS, INC.
2,320,247 SHARES OF COMMON STOCK
Up to 1,120,247 shares of common stock covered by this Prospectus are being
offered for sale by selling stockholders of Avatech, from time to time, at
market prices prevailing at the time of the sale, at fixed prices in privately
negotiated transactions, or otherwise. We are registering these shares to
satisfy registration rights of the selling stockholders. We will receive none of
the proceeds of the sale of these shares. The selling stockholders will receive
all sale proceeds.
This Prospectus also covers up to 1,000,000 shares of our common stock that we
may issue to shareholders of companies we acquire, by merger or otherwise, in
the future, in privately negotiated transactions. Although part of the
consideration in these transactions may consist of cash, we contemplate that the
consideration received by the sellers of acquired companies will consist
primarily of shares of our common stock. We will provide the specific terms of
these transactions in supplements to this Prospectus.
Up to 200,000 shares of Common Stock covered by this Prospectus may be issued
under our Restricted Stock Award Plan.
You should read this Prospectus and any supplement carefully before you invest.
Our common stock is traded on the OTC Bulletin Board under the symbol "AVSO.OB."
The last sale price on March 17, 2003 was $1.25 per share.
Investing in our securities involves risks. See "risk factors" beginning on page
2 to read about factors you should consider before buying shares of our common
stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Date of this Prospectus is ____________, 2003
TABLE OF CONTENTS
Prospectus Summary.....................................................................................1
Risk Factors...........................................................................................2
A Warning About Forward-Looking Statements.............................................................7
Market Price and Dividend Information..................................................................7
Use of Proceeds........................................................................................8
Selling Stockholders...................................................................................9
Selected Financial and Other Data......................................................................9
Management's Discussion and Analysis of Financial Condition and Results of Operations.................11
Changes in and Disagreements with Avatech's Accountants...............................................23
Business..............................................................................................24
Background.......................................................................................24
General..........................................................................................25
Markets..........................................................................................26
Solutions and Products...........................................................................27
Sales and Marketing..............................................................................28
Customers........................................................................................29
Competition......................................................................................29
Intellectual Property............................................................................30
Employees........................................................................................30
Properties.......................................................................................30
Legal Proceedings.....................................................................................31
Management............................................................................................31
Directors and Executive Officers.................................................................31
Executive Compensation...........................................................................33
Certain Relationships and Related Transactions...................................................34
Security Ownership of Certain Beneficial Owners and Management........................................35
Plan of Distribution..................................................................................36
Description of Securities.............................................................................37
Summary of Avatech Solutions, Inc. Restricted Stock Award Plan........................................39
Tax Treatment of Shares Awarded under the Avatech Solutions, Inc. Restricted Stock Award Plan.........40
Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................41
Legal Matters.........................................................................................41
Experts...............................................................................................41
Where You Can Find More Information...................................................................41
What Information You Should Rely On...................................................................43
Index to Financial Statements .....................................................................F - 1
Annex A: Avatech Solutions, Inc. Restricted Stock Award Plan......................................A - 1
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PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus and
may not contain all of the information that is important to you. To understand
the terms of the securities we are offering, you should carefully read this
document with any attached Prospectus supplement. You should also read the
documents to which we have referred you in "Where You Can Find More Information"
below for additional information about our company and our financial statements.
Our Business
Avatech Solutions is a leading provider of design automation and
quality assurance solutions for the manufacturing, building design, civil
engineering, and GIS markets. Headquartered at 11403A Cronhill Drive, Owings
Mills, Maryland 21117, we specialize in software development, technical support,
training and consulting aimed at improving design and documentation efficiencies
and the seamless integration of workflow processes. These technology solutions
enable our customers to enhance productivity, profitability, and competitive
position. We are one of the largest Autodesk software integrators worldwide and
a leading provider of engineering document management solutions. We are the
developer of the award-winning PrescientQA(TM) quality assurance software and
cycle time reduction products for the manufacturing supply chain. We sell this
product line predominantly to the manufacturing industry with special focus on
the computer-aided design (CAD), manufacturing (CAM) and engineering (CAE)
markets.
We have embarked on a revised growth strategy which focuses on
expanding our people resources, product offerings, and geographic "footprint."
We will increase our efforts to attract and employ highly qualified
professionals throughout our organization, including salespeople, applications
engineers, and software developers. Our portfolio of products and services will
expand to include new relationships with other software manufacturers,
additional service offerings, and continued development of new proprietary
software products to support our planned entry into the product lifecycle
management (PLM) market. This diversification strategy is intended to match our
product and service offerings more precisely with the needs of our customers. We
have reached agreement in principal with Unigraphics Solutions, Inc. ("UGS") a
wholly-owned subsidiary of Electronic Data Systems Corporation ("EDS"), and one
of the largest manufactures of PLM software solutions. We expect to enter into a
strategic relationship in which we will work together with EDS to promote PLM
solutions through our national sales and marketing force. We contemplate
entering into an EDS PLM Certified Reseller Agreement in the Spring of 2003.
We will support geographic expansion by targeted mergers and
acquisitions, the opening of new locations, and expanded international product
distribution relationships.
Risk Factors
Purchasers of our common stock should consider carefully, in addition
to the other information contain in or incorporated by reference into this
Prospectus or any supplement, the risk factors set forth in the Risk Factors
section beginning on page 2.
Use of Proceeds
We will not receive any proceeds from the sale of our common stock
under this Prospectus by the selling stockholders identified under "Selling
Stockholders" or from the issuance of shares under our Restricted Stock Award
Plan. We will not receive cash proceeds from the issuance of shares to
stockholders of companies we acquire by merger or otherwise, but will instead
receive all of the capital stock or all of the assets of those companies in
connection with acquisition and merger transactions.
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Plan of Distribution
The selling stockholders will sell shares covered by this Prospectus
in open-market transactions effectuated on the OTC Bulletin Board or in
privately negotiated transactions. Shares issued to stockholders of companies we
acquire, by merger or otherwise, will be issued in private, negotiated merger or
other form of acquisition transaction. We will issue shares under our Restricted
Stock Award Plan directly to participating individuals.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, BEFORE
DETERMINING WHETHER OR NOT TO INVEST IN SHARES OF OUR COMMON STOCK.
We have a history of significant losses, expect to incur additional losses and
may never achieve profitability.
In five fiscal years of operation, we have reported a net profit only
in the fiscal year ending June 30, 2001. We expect to incur net losses for the
foreseeable future because our expected operating and marketing expenses will
increase as we attempt to grow our business. With increased expenses, we will
need to generate significant additional revenue to achieve profitability. As a
result, we may never become profitable. Even if we do achieve profitability in
any period, we may not be able to sustain or increase profitability on a
quarterly or an annual basis.
Increased costs resulting from our merger with PlanetCAD have reduced working
capital and will continue to place strains on our liquidity in future periods.
We have experienced a decline in working capital resulting from
unexpectedly high costs incurred to complete the merger with PlanetCAD, in most
cases, professional and printing costs substantially in excess of original
estimates. The result has been a reduction in the amount of working capital that
we have to fund current operations. Unless we raise additional capital or
negotiate successfully with various service providers in the merger transaction
to reduce fees and charges claimed by them, we will continue to experience
working capital deficits that could have a materially adverse effect on our
operations in future periods.
We have a limited operating history, which makes it difficult to evaluate our
business and prospects.
We began operations in 1997, with the merger of four founding
companies. Since that time, we have acquired seven additional companies, all of
which haven been operating together for less than four years. Management has
been working to successfully integrate these businesses and their disparate
operations, employees and management structures and personnel. These activities
may adversely impact our business, financial condition and results of operations
and may also delay the integration of companies to be acquired in the future.
The limited history and continuing evolution of our operations makes it
difficult to evaluate our business and prospects. Our prospects must be
considered in light of the risks, uncertainties, expenses, and difficulties
frequently encountered by companies in their early stages of development. If we
fail to address these risks and uncertainties, we may be unable to grow our
business, increase our revenue, or become profitable.
Our cycle time reduction business line may never be successful.
Our products and services to reduce cycle time for supply chain
manufacturers are new and unproven and may never be successful. The success of
this line of products and services, acquired as a result of our merger with
PlanetCAD, depends on a number of factors. These factors include:
. competition from other supply chain management software
developers;
. the size of information technology budgets for the purchase of
our enterprise software solutions and services;
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. confidence in our long-term strength as a service provider;
. our ability to introduce and sell products such as SCS-Envoy
to supply chain manufacturers of our existing customers;
. our ability to differentiate the product SCS-Envoy from those
of our competitors; and
. our ability to continue to differentiate and support our
PrescientQA line of products.
Failure of PLM software products and services to gain general market acceptance
would damage our business since we expect to devote substantial resources to the
implementation of a diversification strategy involving PLM software products.
Although we believe that PLM software products and services represent
a substantial new growth market, because of the way PLM radically enhances
manufacturers' ability to bring quality products to market and enhance and
manage them throughout their active lifecycle, there can be no assurance that
PLM will gain widespread acceptance in the manufacturing sector or that, if it
does, we will have the resources, financial and otherwise, to capitalize on the
growing PLM market due to limited financial resources, competition, and other
factors.
Our PLM reseller relationship with Electronic Data Corporation, if consummated,
will require us to devote resources to market and sell a product that may not
generate substantial revenue.
We have entered into a letter of understanding with EDS that
contemplates that we will become a certified reseller of EDS' PLM products and
we intend to dedicate personnel and other resources to marketing and selling
these products. If PLM products generally, or EDS' PLM products specifically, do
not gain acceptance in the manufacturing sector, we may not generate sufficient
revenues to offset our costs.
Our inability to compete with competitors with superior resources may cause our
revenues and stock price to decline significantly.
The markets for our products and services are highly competitive,
rapidly changing, and subject to constant technological innovation. Participants
in these markets face constant pressure to accelerate the release of new
products, enhance existing products, introduce new product features, and reduce
prices. Most of our competitors or potential competitors have significantly
greater financial, managerial, technical, and marketing resources than we do.
Accordingly, we may be unable to compete effectively in our markets and as a
result, our revenues and stock price may decline significantly.
Our products may contain undetected errors that could harm our sales and revenue
and result in increased operating expenses and liabilities.
Our business depends on complex computer software, both internally
developed and licensed from third parties. Complex software often contains
defects, particularly when first introduced or when new versions are released.
Although we conduct extensive testing, we may not discover software defects that
affect new or current products and services or enhancements until after they are
deployed. If we market products and services that contain errors or that do not
function properly, we may experience negative publicity, loss of or delay in
market acceptance, or claims against us by customers, any of which could harm
our current and future sales or result in expenses and liabilities that could
reduce our operating results and adversely affect our financial condition and
the market for our common stock. In the past, we have discovered software errors
in some new products and enhancements after their introduction, and we may find
errors in current or future new products or releases after commencement of
commercial use.
- 3 -
Our inability to efficiently complete or integrate recent acquisitions or future
strategic acquisitions, may divert management resources away from business
operations and cause greater expenses and decreased revenues and sales.
We may find it necessary or desirable to acquire additional
complementary businesses, products or technologies. Integrating product
acquisitions and completing any future acquisitions could cause significant
diversions of management time and resources. Managing acquired businesses
entails numerous operational and financial risks. These risks include difficulty
in assimilating acquired operations, diversion of management's attention, and
the potential loss of key employees or customers of acquired operations. We may
not be able to effectively integrate any such acquisitions, and our failure to
do so could result in significant expenses and lost revenue.
If we are unable to protect our proprietary rights, our ability to compete will
suffer.
Our proprietary technologies are important to our success and ability
to compete in our cycle time reduction line of business. We rely, to some
extent, on trade secret and copyright laws to protect certain proprietary
technologies, but our efforts may be inadequate to protect these proprietary
rights. Further, effective trade secret and copyright protection may not be
available in all foreign countries. The unauthorized misappropriation of our
technology could have a material adverse effect on our ability to compete. In
addition, if we were to resort to legal proceedings to enforce our proprietary
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk.
We may inadvertently infringe on third party proprietary rights, which could
result in costly litigation, reduced sales and revenue and a decline in the
price of our stock.
We also may be subject to claims alleging that we have infringed third
party proprietary rights. Litigating such claims, whether meritorious or not, is
costly. The expenditure of such costs, and the accompanying diversion of
management time to such litigation, may cause a decrease in attention to sales
and product development and a corresponding decrease in revenue. These claims
might require us to enter into royalty or license agreements with terms
unfavorable to us. If we were found to have infringed upon the proprietary
rights of third parties, we could be required to pay damages, cease sales of the
infringing products, or redesign or discontinue such products, any of which
could materially reduce our sales and revenue and cause a decline in the market
price for our common stock.
Our certificate of incorporation, bylaws, and anti-takeover protections could
delay or prevent an acquisition or sale of Avatech and thus, prevent the
stockholders from receiving any potential benefit from an offer to acquire
Avatech.
Our charter and bylaws, resulting from our merger with PlanetCAD, as
well as the General Corporation Law of the State of Delaware, may deter,
discourage, or make more difficult a change in control, even if such a change in
control would benefit our stockholders. As a result, stockholders may be unable
to receive any economic or other benefit contained in any proposal. In
particular, the board of directors may issue preferred stock having such
designations, rights, and preferences as they determine; only stockholders
owning not less than two-thirds of the outstanding shares may call special
meetings of stockholders; advance notice is required for presentation of new
business and nominations of directors at meetings of stockholders; and our
bylaws may be amended only by the board of directors or by the holders of
two-thirds of the outstanding voting stock.
In addition, under our stockholder rights plan, in general, if a
person or group acquires more than 15% of the outstanding shares of common
stock, all of our other stockholders would have the right to purchase securities
from us at a discount to such securities' fair market value, thus causing
substantial dilution to the holdings of that acquiring person or group. Finally,
under Delaware law, a corporation may not engage in a business combination with
any holder of 15% or more of our capital stock until the holder has held the
stock for three years unless, among other possibilities, the board of directors
approves the transaction.
- 4 -
The high volatility of our stock price could materially and adversely affect the
price of our stock.
The market price of our common stock has been highly volatile and is
likely to continue to be volatile. Factors affecting our stock price may
include:
. fluctuations in sales or operating results;
. announcements of technological innovations or new software
standards by us or our competitors;
. published reports of securities analysts;
. developments in patent or other proprietary rights;
. changes in our relationships with development partners and
other strategic alliance partners; and
. general market conditions, especially regarding the general
performance of comparable technology stocks.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.
General economic conditions may reduce our net revenues and harm our business.
As our business has grown, we have become increasingly subject to the
risks arising from adverse changes in domestic and global economic conditions.
Because of the recent slowdown in the U.S. economy, many customers are delaying
or reducing technology purchases. The impact of this slowdown is difficult to
predict, but it may result in reductions in sales of our products and services,
longer sales cycles, slower adoption of new technologies, and increased price
competition. In addition, weakness in the end-user market could negatively
affect the cash flow of our customers, who could in turn delay paying their
obligations to us, which would increase our credit risk exposure. Any of these
events would likely harm our business, results of operations, and financial
condition.
Our operating results fluctuate from quarter to quarter, making our future
revenues and operating results difficult to predict.
Our quarterly operating results have fluctuated in the past and are
likely to do so in the future. Some of the factors that could cause our
operating results to fluctuate include, among other things, the timing of the
introduction of new products or delays in product releases by our major software
vendors such as Autodesk, changes in marketing or operating expenses, changes in
a major software vendor's pricing or product mix, changes in compensation
practices, the timing of large solution sales or implementation, and general
economic conditions. Additionally, our operating expenses are based in part on
our expectations for future revenues and are relatively fixed in the short term.
Accordingly, any revenue shortfall below expectations could have an immediate
and significant adverse effect on our profitability.
If we are unable to raise additional capital on favorable terms, our ability to
fund growth and otherwise operate our business will be significantly limited.
We need to raise additional capital to fund operating losses, develop
and enhance our services and products, fund expansion, respond to competitive
pressures, or acquire complementary businesses or technologies. We may not be
able to raise additional financing on favorable terms, if at all. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders will be reduced and the securities
issued may have rights, preferences, or privileges senior to those of our common
stock. If we cannot raise adequate funds on acceptable terms, our ability to
fund growth, take advantage of business opportunities, develop or enhance
services or products, or otherwise respond to competitive pressures will be
significantly limited. Insufficient funds may require us to scale-back or
eliminate some or all of our plans for growth.
- 5 -
Competition in the design software market may reduce our net revenues and
profits.
The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capacity at
progressively lower prices contributes to the ease of competitive market entry.
The design software market in particular is fairly mature and characterized by
vigorous competition in each of the vertical markets in which we compete, both
by entry of competitors with innovative technologies and by consolidation of
companies with complementary products and technologies. In addition, some of our
competitors have greater financial, technical, sales and marketing, and other
resources. Furthermore, the availability of third-party application software is
a competitive factor within the computer aided design market. Because of these
and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price reductions,
reduced net revenues and profit margins, and loss of market share, any of which
would likely harm our business.
Our reliance on the sale of a single software vendor's products could decrease
our revenues and our profitability.
We derive over 90% of our net revenues from the sale and integration
of Autodesk products and from providing upgrades to those products. As such, if
sales of Autodesk products and upgrades decrease, our revenues will decrease,
which will adversely affect our profitability.
If our relationship with Autodesk is not renewed each year, our revenues would
significantly decrease and such decrease would jeopardize our viability.
Our continued growth and future success are largely dependent upon
maintaining our relationship with Autodesk. While our current relationship with
Autodesk is amicable, there can be no assurance that this relationship will
continue. Under the terms of the Autodesk Channel Partner Agreement, this
relationship must be renewed each year. Since over 90% of our revenues are
attributable to the resale of Autodesk products, Autodesk's failure to renew its
relationship with us would significantly decrease our sales, revenues and
overall financial condition, which would jeopardize our viability.
Our current Channel Partner Agreement with Autodesk has expired and we have not
yet finalized a new one.
Our Channel Partner Agreement with Autodesk expired on January 31,
2003. We are seeking to amend a number of its terms prior to entering into a new
agreement. Although we continue to operate under the expired agreement on a de
facto basis and believe our dominance in Autodesk's distribution channel does
not create any significant possibility of Autodesk not providing us with
products for resale, it is possible that Autodesk could refuse to supply
products to us or do so on unfavorable terms.
Any acquisition we make could disrupt our business and harm our financial
condition and operations.
In an effort to effectively compete in the design automation solutions
market where increasing competition and industry consolidation prevail, we may
acquire complementary businesses in the future. In the event of any future
acquisitions, we could:
. issue additional stock that would dilute our current
shareholders' percentage ownership;
. incur debt and assume liabilities;
. incur amortization expenses related to goodwill and other
intangible assets; or
. incur large and immediate write-offs.
- 6 -
We may not be able to successfully expand through strategic acquisitions, which
could decrease our profitability.
A key element of our strategy is to pursue strategic acquisitions that
either expand or complement our business, in order to increase revenues. We may
not be able to identify additional attractive acquisition candidates on terms
favorable to us or in a timely manner. We may require additional debt or equity
financing for future acquisitions, which may not be available on terms favorable
to us, if at all. Moreover, we may not be able to successfully integrate any
acquired businesses into our business or to operate any acquired businesses
profitably. Each of these factors may contribute to our inability to
successfully expand through strategic acquisitions, which could ultimately
result in increased costs without a corresponding increase in revenues, which
would result in decreased profitability.
Our future success depends upon our ability to hire key personnel.
Our operations are dependent upon the efforts of senior management and
highly skilled employees. We will likely also be dependent on the senior
management of companies that may be acquired in the future. The loss of key
employees or the inability to recruit new employees would negatively impact our
business. In addition, we may experience increased compensation costs to attract
and retain skilled personnel.
Recipients of Common Stock under our Restricted Stock Award Plan will recognize
taxable income for Federal income tax purposes on each "vesting date" under
their restricted stock grant.
Recipients of restricted stock under our Restricted Stock Award Plan
will be deemed to have received income as to "vested shares" equal to the sum
obtained by multiplying the fair market value of our common stock on the vesting
date by the number of vested shares, and will be required to pay income taxes on
that amount. Alternatively, recipients can make an election under Section 83(b)
of the Internal Revenue Code of 1986, as amended, in which case, as to vested as
well as unvested shares, recipients will be taxed on the fair market value of
all shares received as of the date of issuance.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) in this document and in
documents that are incorporated by reference in this document that are subject
to risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of our operations. Also,
statements including words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," or similar expressions are forward-looking
statements. Purchasers of shares offered hereby should note that many factors,
some of which are discussed elsewhere in this document and in the documents
incorporated by reference in this document, could affect our future financial
results and could cause actual results to differ materially from those expressed
in forward-looking statements contained or incorporated by reference in this
document. Important factors that could cause actual results to differ materially
from the expectations reflected in the forward-looking statements in this
Prospectus include, among others, the factors set forth under the caption "Risk
Factors," general economic, business and market conditions, changes in laws, and
increased competitive pressure in the CAD, CAM, CAE, GIS, customer management,
and product support industries.
MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICE DATA
Prior to our merger with PlanetCAD, PlanetCAD's common stock was
listed on the American Stock Exchange under the symbol "PCD". Since the date of
the merger, our common stock has been trading on the OTC Bulletin Board under
the symbol "AVSO.OB". The following table indicates the high and low sales
prices per share, rounded to the nearest whole cent, reported by the American
Stock Exchange, for the periods indicated prior to
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November 20, 2002 and as available through the OTC market for the periods
indicated since that date. The OTC quotations represent prices between dealers
and do not reflect the retailer markups, markdowns or commissions, and may not
represent actual transactions. All prices shown have been restated to reflect
the one-for-twenty reverse stock split that occured on October 22, 2002, and the
high and low prices shown for the period from November 20, 2002 through March 7,
2003 are for the period after the reverse stock split.
PERIOD HIGH LOW
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2000
First Quarter...................................... $ 240.00* $ 77.60*
Second Quarter..................................... 160.00* 62.60*
Third Quarter...................................... 88.80* 35.00*
Fourth Quarter..................................... 65.00* 10.00*
2001
First Quarter...................................... $ 27.60* $ 6.00*
Second Quarter..................................... 15.00* 8.00*
Third Quarter...................................... 11.00* 3.00*
Fourth Quarter..................................... 4.80* 2.00*
2002
First Quarter...................................... $ 4.40* $ 3.40*
Second Quarter..................................... 8.60* 3.40*
Third Quarter...................................... 8.60* 4.80*
Period from November 20, 2002 through March 7, 2003
OTC Bulletin Board................................ $ 1.95 $ 0.25
* These figures have been multiplied by twenty to adjust for the 1 for
20 reverse stock split occurring on October 22, 2002.
RECENT CLOSING PRICES
On March 17, 2003, the closing price for our common stock on the OTC
Bulletin Board, as reported by the Reuters, was $1.25.
DIVIDEND INFORMATION
We have never paid any cash dividends on our common stock and we
anticipate that we will continue to retain any earnings for the foreseeable
future for use in the expansion and operation of our business.
NUMBER OF STOCKHOLDERS
As of January 31, 2003, there were 219 holders of record of our common
stock.
USE OF PROCEEDS
Proceeds from the sale of shares owned by the Selling Stockholders
will be received by such stockholders and we will receive none of those
proceeds.
We will receive no proceeds from the issuance of shares under our
Restricted Stock Award Plan.
- 8 -
In exchange for the issuance of shares of our common stock to the
shareholders or owners of companies we acquire, by merger or otherwise, we
expect to receive all of the issued and outstanding shares of capital stock of
those companies, or all or substantially all, of their assets, business, and
properties.
SELLING STOCKHOLDERS
The following shows the name, address, and number of shares of our
common stock owned by the Selling Stockholders who may sell shares covered by
this Prospectus:
Name and Address Number of Shares
---------------- ----------------
Capstone Ventures SBIC, L.P. 30,497
3000 Sand Hill Road
Building 1, Suite 290
Menlo Park, CA 94025
The Roser Partnershp III, SBIC, L.P. 26,141
1105 Spruce Street
Boulder, CO 80302
J.F. Shea Co., Inc. as Nominee 20,041
2000-25
655 Brea Canyon Road
Walnut, CA 91789
Cypress Growth Fund III, L.P. 17,427
300 Sand Hill Road
Building 1, Suite 140
Menlo Park, CA 94025
Dassault Systems Corp. 17,427
9 Quai Marcel Dassault
9/150 Suresnes
France
Dolphin Offshore Partners, L.P. 8,714
129 E. 17th Street
New York, NY 10003
TOTALS 120,247
----------------
In addition, purchasers of our Series C Convertible Preferred Stock
shall have the right to resell shares of common stock acquired upon conversion
of their shares of Preferred Stock under this Prospectus. Information regarding
their names addresses, and share ownership, will be set forth in a supplement to
this Prospectus.
SELECTED FINANCIAL AND OTHER DATA
The following selected historical consolidated financial data is
derived from our audited financial statements as of and for the five years ended
June 30, 2002. The financial data for the six-month periods ended December 31,
2002 and 2001 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, that we consider necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the six months ended December 31, 2002 are not necessarily indicative of the
results that may be expected for the entire year ending June
- 9 -
30, 2003. The following consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere in this Registration Statement.
Six Months Ended Years ended
December 31, June 30,
--------------------------- ------------------------------------------
STATEMENT OF OPERATIONS DATA: 2002 2001 2002 2001 2000
--------------------------- ------------------------------------------
Revenue:
Product sales $ 6,904,130 $ 9,895,458 $ 18,486,676 $ 20,490,029 $ 22,436,739
Service revenues 3,313,859 2,908,982 6,482,160 6,049,275 7,519,169
Commission revenue 2,082,770 2,319,198 4,843,751 4,332,174 3,199,443
------------ ------------ ------------ ------------ ------------
Total revenue 12,300,759 15,123,638 29,812,587 30,871,478 33,155,351
Cost of revenue:
Cost of product sales 4,581,813 6,582,974 12,464,965 14,249,470 16,228,849
Cost of service revenue 2,075,573 1,826,517 3,773,041 3,813,635 4,664,518
------------ ------------ ------------ ------------ ------------
Total cost of revenue 6,657,386 8,409,491 16,238,006 18,063,105 20,893,367
Gross margin 5,643,373 6,714,147 13,574,581 12,808,373 12,261,984
Other expenses:
Selling, general and administrative 6,282,221 6,377,576 12,806,324 11,519,199 12,919,902
Depreciation and amortization 313,642 331,872 589,306 694,503 692,180
Impairment loss -- -- 285,374 -- --
Acquired in-process research and
development 282,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total other expenses 6,877,863 6,709,448 13,681,004 12,213,702 13,612,082
------------ ------------ ------------ ------------ ------------
Income/(loss) from operations (1,234,490) 4,699 (106,423) 594,671 (1,350,098)
Other income/(expense)
------------ ------------ ------------ ------------ ------------
Gain on the extinguishment of debt 1,960,646 -- -- -- --
Interest and other income/ (expense) 24,737 71,181 61,510 61,488 (61,819)
Minority interest (17,891) -- -- -- --
Interest expense (157,655) (252,612) (487,582) (553,823) (641,320)
------------ ------------ ------------ ------------ ------------
1,809,837 (181,431) (426,072) (492,335) (703,139)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 575,347 (176,732) (532,495) 102,336 (2,053,237)
Income tax expense (benefit) 403,000 22,843 (285,000) 13,000 --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 172,347 $ (199,575) $ (247,495) $ 89,336 $ (2,053,237)
============ ============ ============ ============ ============
Earnings (loss) per common share -
basic and diluted $ 0.07 $ (0.09) $ (0.11) $ 0.04 $ (0.91)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding - basic and diluted 2,390,790 2,220,670 2,224,993 2,220,856 2,251,402
============ ============ ============ ============ ============
Years ended
June 30,
---------------------------
STATEMENT OF OPERATIONS DATA: 1999 1998
---------------------------
Revenue:
Product sales $ 26,668,743 $ 23,968,375
Service revenues 6,871,010 5,936,998
Commission revenue 3,432,413 1,981,224
------------ ------------
Total revenue 36,972,166 31,886,597
Cost of revenue:
Cost of product sales 19,664,861 17,426,413
Cost of service revenue 4,980,225 3,315,193
------------ ------------
Total cost of revenue 24,645,086 20,741,606
Gross margin 12,327,080 11,144,991
Other expenses:
Selling, general and administrative 12,940,965 10,688,583
Depreciation and amortization 736,196 586,646
Impairment loss -- --
Acquired in-process research and
development -- --
------------ ------------
Total other expenses 13,677,161 11,275,229
------------ ------------
Income/(loss) from operations (1,350,081) (130,238)
Other income/(expense)
------------ ------------
Gain on the extinguishment of debt -- --
Interest and other income/ (expense) (18,703) 31,996
Minority interest -- --
Interest expense (484,932) (234,318)
(503,635) (202,322)
------------ ------------
Income (loss) before income taxes (1,853,716) (332,560)
Income tax expense (benefit) -- 22,049
------------ ------------
Net income (loss) $ (1,853,716) $ (354,609)
============ ============
Earnings (loss) per common share -
basic and diluted $ (0.83) $ (0.17)
============ ============
Weighted average number of common
shares outstanding - basic and diluted 2,236,711 2,028,981
============ ============
- 10 -
As of June 30,
As of ------------------------------------------------------------------------
BALANCE SHEET DATA: December 31, 2002 2002 2001 2000 1999 1998
----------------- ------------------------------------------------------------------------
(unaudited)
Cash and cash equivalents $ 541,855 $ 222,562 $ 309,621 $ 423,307 $ 1,198,675 $ 900,461
Working capital (3,296,830) (1,615,747) (3,927,450) (1,257,780) 157,394 (959,977)
Total assets 7,863,149 7,108,413 8,377,015 7,920,247 9,827,994 8,648,728
Total debt 2,182,590 5,980,013 6,480,880 5,750,883 6,492,239 3,205,274
Total stockholders' deficiency (2,280,515) (3,737,862) (3,424,838) (3,427,041) (1,609,640) (132,431)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF AVATECH SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROXY STATEMENT/PROSPECTUS.
Certain statements set forth below constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risk,
uncertainties, and other factors including, but not limited to, those discussed
in the annual and quarterly reports, that may cause Avatech's actual results,
performance, or achievements to be materially different from any future results,
performance, or achievements implied by such forward-looking statements. Given
these uncertainties, investors and prospective investors are cautioned not to
place undue reliance on such forward-looking statements. Avatech disclaims any
obligation to update information contained in any forward-looking statement.
OVERVIEW
Avatech Solutions is a leading provider of design automation and
quality assurance solutions for the manufacturing, building design, civil
engineering, and GIS markets. The company specializes in software development,
technical support, training, and consulting aimed at improving design and
documentation efficiencies and the seamless integration of workflow processes.
These technology solutions enable Avatech's customers to enhance productivity,
profitability, and competitive position. Avatech is one of the largest Autodesk
software integrators worldwide and a leading provider of engineering document
management solutions. Additionally, Avatech is the developer of the
award-winning PrescientQA(TM) quality assurance software and cycle time
reduction products for the manufacturing supply chain. This product line is sold
predominantly to the manufacturing industry with special focus on the
computer-aided design (CAD), manufacturing (CAM) and engineering (CAE) markets.
Avatech has embarked on a revised growth strategy which focuses on
expanding its people, resources, product offerings, and geographic "footprint."
The company plans to increase its efforts to attract and employ highly qualified
professionals throughout the organization, including salespeople, applications
engineers, and software developers. The company's portfolio of products and
services will expand to include new relationships with other software
manufacturers, additional service offerings, and continued development of new
proprietary software products to support its planned entry into the product
lifecycle management (PLM) market. Geographic expansion will be supported by
targeted mergers and acquisitions, the opening of new locations, and expanded
international product distribution relationships. This diversification strategy
is intended to match Avatech's product and service offerings more precisely with
the needs of its customers.
PRODUCT SALES
Avatech product sales are primarily the resale of packaged design
software programs that are installed on a user workstation, on a local area
network server, or in a hosted environment. The programs perform and support a
wide variety of functions related to design, modeling, drafting, mapping,
rendering, and facilities management tasks. Avatech is the largest domestic
reseller of design software developed by Autodesk, one of the world's leading
design software and digital content companies for building design and land
development, manufacturing, utilities,
- 11 -
telecommunications, wireless data services, and digital media. Approximately 90%
of Avatech's total product revenues are related to Autodesk products.
Product sales also include hardware that Avatech may purchase for the
convenience of its customers. During fiscal 1999, Avatech made a strategic
decision to de-emphasize the resale of hardware products as the future profit
margins for these offerings were deteriorating. Product hardware sales do not
represent a significant percentage of total revenues for Avatech in any of the
periods presented.
As a result of the merger with PlanetCAD, Avatech offers proprietary
software products through its distribution channel. Avatech's enterprise
software products include PrescientQA(TM) and the new SCS|Envoy(TM) supply chain
solution software. PrescientQA(TM) is quality assurance software that detects,
assesses, corrects, and even prevents product development problems caused by
modeling practices that are inaccurate, incomplete, inconsistent, or all three.
These problems, generally undetected, account for approximately 45% of the
engineering change orders in a typical organization. Prescient technology is the
only quality assurance solution that works across multiple CAD systems,
including CATIA(R), Pro/Engineer(R), Unigraphics(R), and Autodesk Inventor(R),
with a single reporting and configuration system.
SERVICE REVENUE
Avatech provides services in the form of training, technical support,
and professional services. Product and process education classes are offered at
Avatech's training facilities or directly at a customer site. Avatech's class
instructors are application engineers who have formal training or industry
experience in the course content. Technical support services are provided
primarily through Avatech's telephone support center located in Omaha, Nebraska.
Through its staff of full time consultants, Avatech provides assistance to
customers making inquiries concerning software products that it sells.
Professional services are project-focused offerings that are fulfilled primarily
with Avatech's own application engineers and programmers and can include
software customization, data migration, computer aided design standards
consulting, workflow analysis, and implementation assistance for complex
software products.
COMMISSION REVENUE
Avatech generates commission revenue from the resale of Autodesk
software to certain customers designated as major Autodesk accounts. Autodesk
considers certain customers to be major accounts based on specified criteria,
primarily sales volume. Avatech is responsible for managing and reselling
product to certain of these accounts; however, the software product is shipped
directly from Autodesk to the customer. Avatech has received commissions ranging
from 17% to 26% on the product sales price depending upon the product type and
volume. Commission revenues are recognized upon shipment of the product from
Autodesk to the customer.
COST OF PRODUCT SALES
Cost of product sales consists of Avatech's cost of purchasing the
products from the software suppliers or hardware manufacturers. Additionally,
the associated shipping and handling costs are included in cost of product
sales.
COST OF SERVICE REVENUE
Cost of service revenue includes the direct costs associated with the
implementation of software and hardware solutions as well as training, support
services, and professional services. These costs consist primarily of
compensation, benefits, travel, and the costs of third-party contractors engaged
by Avatech. Cost of service revenue does not include an allocation of overhead
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense consists primarily of
compensation and other expenses associated with management, finance, human
resources, and information systems. Additionally, advertising and
- 12 -
public relations expense as well as expenses for facilities such as rent and
utilities are included in selling, general and administrative expense.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense represents the period costs
associated with Avatech's investment in property and equipment and amortizable
intangible assets. Property and equipment consists principally of computer
equipment, software, furniture and fixtures, and leasehold improvements.
Depreciation and amortization expense is computed using the straight-line
method. Additionally, Avatech leases all of its facilities and depreciates
leasehold improvements over the lesser of the lease term or the useful life of
the asset.
Goodwill is the excess of the purchase price paid over the value of
the identifiable net assets acquired in purchase business combinations and was
being amortized over the expected period of benefit primarily 15 years. As of
July 1, 2002, Avatech no longer amortizes this goodwill, but rather makes annual
assessments of impairment.
The Company amortizes acquired intangible assets with definite lives
over their estimated useful life. These assets consist principally of
non-complete arrangements and technology acquired in the acquisition of
PlanetCAD, which are amortized over useful lives ranging from 4 to 6 years.
INTEREST EXPENSE
Interest expense consists primarily of interest on Avatech's revolving
line-of-credit and subordinated debt, which it incurred to fund operations over
the past three years.
CRITICAL ACCOUNTING POLICIES
General. Avatech's consolidated financial statements are impacted by
the accounting policies used and the estimates and assumptions made by
management during their preparation. Critical accounting policies and estimates
that impact the consolidated financial statements are those that relate to
software revenue recognition, estimates of bad debts, and estimates of the
recoverability of goodwill. A summary of the significant accounting policies can
be found in the Notes to the Consolidated Financial Statements. Presented below
is a description of the accounting policies that Avatech believes are most
critical to understanding the consolidated financial statements.
Software Revenue Recognition. Avatech derives most of its revenue from
the resale of packaged software programs. Product sales also include hardware
that may be purchased for the convenience of customers. Historically, Avatech
has not experienced significant customer returns. Avatech also earns service
revenue from training and other professional services for the products that are
sold. These services are not essential to the functionality of the software.
Additionally, Avatech offers annual support contracts to its customers for the
software products that it sells. Maintenance and support services are also sold
under hourly billing arrangements.
Revenue from software arrangements is recognized in accordance with
the provisions of Statement of Position No. 97-2, Software Revenue Recognition,
as amended by SOP No 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. Prior to recognizing any
revenue under these arrangements, (1) persuasive evidence of an arrangement must
exist, (2) delivery of the software or service must have occurred, (3) all fees
must be assessed as fixed or determinable and (4) all fees must be probable of
collection. Determination of criteria (3) and (4) are based on management's
judgments regarding the fixed nature of the fee charged for services rendered
and products delivered and the collectibility of those fees. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognized for any reporting period could be
adversely affected.
Avatech's customer arrangements can involve the sale of two or more
elements. When this occurs, revenue is allocated to each element based on the
relative fair value of each element. Avatech limits the assessment of fair value
to the price that is charged when the element is sold separately. All of the
elements included in the multiple element arrangements have been analyzed, which
may include products that are resold, training and other professional services,
and support services. Avatech has determined that sufficient evidence of the
fair value based
- 13 -
on these separate sales exists to allocate revenue to the specified elements.
Training and other professional services revenue is recognized as services are
delivered and support revenue is recognized ratably over the respective contract
term. All unrecognized fees that have been billed are included in deferred
revenue.
Bad Debts. Avatech maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to pay for
products and services that are sold or for disputes that affect its ability to
fully collect its accounts receivable. Avatech estimates this allowance by
reviewing the status of past-due accounts and recording general reserves based
on historical bad debt expense. Avatech's actual experience has not varied
significantly from its estimates. However, if the financial condition of
Avatech's customers were to deteriorate, resulting in their inability to pay for
products or services, Avatech may need to record additional allowances in future
periods. To mitigate this risk, Avatech performs ongoing credit evaluations of
its customers.
Recoverability of Goodwill. Avatech has remaining goodwill of $0.9
million at December 31, 2002. As of July 1, 2002, Avatech adopted Financial
Accounting Standards Board Statement No. 142, Goodwill and Other Intangible
Assets ("Statement 142"). Under the new rules, goodwill and other intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with the Statement. Accordingly, the
Company no longer amortizes this goodwill, but rather makes annual assessments
of impairments. During the second quarter of fiscal 2003, the Company completed
phase one of the transitional impairment tests required by Statement 142, which
indicated that goodwill associated with one of its reporting units was impaired.
The Company will complete phase two of the transitional impairment tests before
the end of fiscal year 2003 at which time any impairment charge for the goodwill
will be recorded as of July 1, 2002. The Company expects that an impairment
charge of approximately $400,000 to $600,000 will be recorded when its
transitional impairment tests are complete.
In the future, the Company will be making impairment tests during the
fourth quarter of each year. In making these assessments, Avatech must make
subjective judgments regarding estimated future cash flows and other factors to
determine the fair value of the reporting units of its business that are
associated with its remaining goodwill. It is possible that these judgments may
change over time as market conditions or strategies change, and these changes
may cause Avatech to record additional impairment charges to adjust goodwill to
its estimated fair value.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
As of July 1, 2002, the Company adopted Financial Accounting Standards
Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("Statement 144"). Statement 144 supersedes and serves to clarify and
further define the provisions of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and provides a single accounting model for long-lived
assets to be disposed of.
Statement 144 does not apply to goodwill and other intangible assets
that are not amortized, and retains the Company's current policy to recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair value
of the asset.
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (Statement 145). Among other changes, Statement 145 rescinds
Statement 4, which required all gains and losses from extinguishment of debt to
be aggregated and classified as an extraordinary item, net of the related tax
effect. Statement 145 provides that gains and losses from extinguishment of debt
should be classified as extraordinary items only if they are unusual or
infrequent or they otherwise meet the criteria for classification as an
extraordinary item, and observes that debt extinguishment transactions would
seldom, if ever, result in extraordinary item classification of the resulting
gains and losses. Avatech adopted Statement 145 effective July 1, 2002. In
August 2002, the Company reported a $2.0 million gain from the early
extinguishment of certain debt.
In July 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (Statement 146). Statement 146
- 14 -
supersedes EITF Issue No. 94-3 Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. Statement 146 requires
that costs associated with an exit or disposal plan be recognized when incurred
rather than at the date of a commitment to an exit or disposal plan. Statement
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002, and early adoption is encouraged. Avatech does not
expect that the adoption of Statement 146 will have a material effect on its
reported results of operations and financial position.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Total revenues for the six months ended December 31, 2002 decreased
$2.8 million, or 18.7%, to $12.3 million, compared to $15.1 million for the same
period in 2001. Overall, the gross margin percentage increased to 45.9% in the
six months ended December 31, 2002, compared to 44.4% in the same period in
2001. For the six months ended December 31, 2002, revenues from product sales
and commissions decreased, while revenues from service increased. The decrease
in revenues from product sales and commissions was due to weak economic
conditions as well as timing of product upgrade cycles. The increase in revenues
from service was a result of a realigned sales organization and a renewed focus
by Avatech as a full solution, service provider for its customers. Although
price changes occurred throughout the period, they did not have a material
effect on fluctuations in revenues. Improved management over the sales
organization has enhanced sales forecasting to better exploit product sales and
service opportunities to larger customers, which attributed to an increase in
service revenues.
Product sales for the six months ended December 31, 2002 decreased
$3.0 million, or 30.2%, to $6.9 million, compared to $9.9 million in the same
period in 2001. The fluctuation in product sales is primarily attributed to weak
economic conditions causing customers to defer purchasing software products as
well as timing of product upgrade cycles. Sales of hardware products also
declined in this period albeit this only represented $149,000 or 5.0% of the
total decrease in product sales. The remaining decrease in product sales is
attributable to a decline in sales volume on software product sales. Software
products sold represented 97.4% and 96.7% of total product sales for the six
months ending December 31, 2002 and 2001, respectively. Also, the sale of
software developed by Autodesk, Inc. represented 89.3% and 94.7% of total
software sales for the six months ending December 31, 2002 and 2001,
respectively.
Service revenue for the six months ended December 31, 2002 increased
$0.4 million, or 13.8%, to $3.3 million, compared to $2.9 million in the same
period in 2001. The increase in service revenue is a result of an increase in
professional and technical support service contracts of $0.5 million or 48.5%,
partially offset by a decline in training of $120,000, or 6.6%, attributable to
the decline in software sales. All of Avatech's professional, technical support
and training services have received additional sales focus as Avatech
transitions to a full solution, service provider of software and services for
its customers.
Commission revenue for the six months ended December 31, 2002
decreased $0.2 million, or 10.2%, to $2.1 million, compared to $2.3 million in
the same period in 2001. The decrease in commission revenues resulted from weak
economic conditions causing major account customers to defer purchasing software
products as well as the timing of product upgrade cycles.
COST OF REVENUES AND EXPENSES
COSTS OF REVENUE
Cost of product sales for the six months ended December 31, 2002
decreased $2.0 million, or 30.4.%, to $4.6 million, compared to $6.6 million for
the same period in 2001. Cost of product sales as a percentage of related
revenue for the six months ended December 31, 2002 remained relatively
consistent at 66.4% compared to 66.5% in the same period in 2001.
- 15 -
Cost of service revenue for the six months ended December 31, 2002
increased $0.3 million, or 13.6%, to $2.1 million compared to $1.8 million for
the same period in 2001. Cost of service revenue as a percentage of related
revenue for the six months ended December 31, 2002 decreased slightly to 62.6%
from 62.8% in the same period in 2001. The modest decrease in cost of service
revenue as a percentage of revenue is primarily attributable to more effective
management and improved cost controls over the delivery of these services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the six months ended
December 31, 2002 decreased $0.1 million, or 1.5%, to $6.3 million, compared to
$6.4 million for the same period in 2001. Selling, general and administrative
expense as a percent of total revenues was 51.1% during the six months ended
December 31, 2002, and 42.2% during the same period in 2001. The increase in
selling, general and administrative expense as a percent of total revenues is
attributable to the fixed cost required to support a nationwide network of 22
offices and the added expenses associated with the operation of PlanetCAD after
the merger on November 19, 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the six months ended
December 31, 2002 decreased $18,000 or 5.4%, to $314,000, compared to $332,000
for the same period in 2001. Depreciation and amortization expense of property
and equipment increased as a result of the merger with PlanetCAD. The increase
was offset by amortization expense of $48,000 on unamortized goodwill that was
recorded for the six months ended December 31, 2001. On July 1, 2002, the
Company adopted Statement 142 and no longer amortizes goodwill.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of PlanetCAD in November 2002, the
Company allocated $282,000 of the purchase price to in-process research and
development projects. This allocation represents the estimated fair value based
on discounted cash flows related to the incomplete research and development
projects. At the time of acquisition, the progress of these technologies had not
yet reached technological feasibility and the technologies had no alternative
future uses. Accordingly, these costs were expensed as of the acquisition date.
OTHER INCOME (EXPENSE)
Other income for the six months ended December 31, 2002 increased $2.0
million to $1.8 million, compared to $(0.2) million for the same period in 2001.
The significant increase in other income is attributable to a gain recorded for
the extinguishment of debt. In January 1999, Avatech borrowed $3.0 million from
a junior lender. In August 2002, Avatech executed an agreement to extinguish the
debt for a cash payment of $1.0 million resulting in a $2.0 million gain on the
extinguishment of debt.
INCOME TAXES
Income tax expense for the six months ended December 31, 2002 was
$0.4. In August 2002, the Company realized a $1.96 million taxable gain from the
extinguishment of certain debt, which resulted in a net deferred tax asset of
$0.4 million being recorded at June 30, 2002. During the six months ended
December 31, 2002, the Company recorded deferred income tax expense of $0.4
million related to the estimated reduction in deferred tax assets in 2003. This
increase in deferred income tax expense coupled with certain state tax expense
resulted in the additional income tax expense for the six months ended December
31, 2002.
- 16 -
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
The following table sets forth the percentages of total revenues
represented by selected items reflected in our audited Consolidated Statements
of Operations included elsewhere in this registration statement. The
year-to-year comparisons of financial results are not necessarily indicative of
future results.
YEARS ENDED JUNE 30,
-----------------------
2002 2001 2000
----- ----- -----
Revenue:
Product sales 62.0% 66.4% 67.7%
Service revenues 21.7% 19.6% 22.7%
Commission revenue 16.3% 14.0% 9.6%
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
Cost of revenue:
Cost of product sales 41.8% 46.2% 48.9%
Cost of service revenue 12.7% 12.3% 14.1%
----- ----- -----
Total cost of revenue 54.5% 58.5% 63.0%
----- ----- -----
Gross margin 45.5% 41.5% 37.0%
Other expenses:
Selling, general and administrative 43.0% 37.3% 39.0%
Depreciation and amortization 2.1% 2.3% 2.1%
Impairment Loss 0.8% -- --
----- ----- -----
Total other expenses 45.9% 39.6% 41.1%
Income/(loss) from operations (0.4)% 1.9% (4.1)%
Other income/(expense):
Interest and other income/(expense) 0.2% 0.2% (0.2)%
Interest expense (1.6)% (1.8)% (1.9)%
----- ----- -----
(1.4)% (1.6)% (2.1)%
Income before income taxes (1.8)% 0.3% (6.2)%
Income tax expense (benefit) (1.0)% 0.0% 0.0%
----- ----- -----
Net income (loss) (0.8)% 0.3% (6.2)%
===== ===== =====
YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001
REVENUES
Total revenues for the year ended June 30, 2002 decreased $1.1
million, or 3.4%, to $29.8 million, compared to $30.9 million for the same
period in 2001. Overall, the gross margin percentage increased to 45.5% in the
year ended June 30, 2002, compared to 41.5% in the same period in 2001. For the
year ended June 30, 2002, revenues in two of three categories--service revenue
and commission revenue--increased as a result of a realigned sales organization
and a renewed focus by Avatech as a full solution, service provider for its
customers. Although price changes occurred throughout the period, they did not
have a material effect on fluctuations in revenues. Avatech realigned its sales
organization in September 2000 and has improved sales forecasting to better
exploit sales opportunities on high margin software products as well as sales to
major accounts, which attributed to an increase in commission revenues.
- 17 -
Product sales for the year ended June 30, 2002 decreased $2.0 million,
or 9.8%, to $18.5 million, compared to $20.5 million in the same period in 2001.
The fluctuation in product sales is attributed to a decrease in sales volume of
software sold through the Company's customer base. In June 2001, Autodesk
announced the release of an upgrade to it most popular version of Computer Aided
Design ("CAD") software. Maintenance support on the former version of CAD
software was phased out in January 2002, which resulted in most major customers
purchasing the software upgrades in 2002. The software sales growth was
completely offset by enhanced efforts to sell more Autodesk major accounts,
thereby increasing commission revenue but reducing product sales, as well as a
significant decline in the resale of hardware products. As Autodesk major
account sales increased, the level of focus on other end product sales then
diminished and resulted in a $1.6 million or 7.8% decrease in related revenues.
Additionally, hardware sales decreased by $436,000, or 46.3% in the period of
2002. The Company has de-emphasized the resale of hardware products to its
customers.
Service revenue for the year ended June 30, 2002 increased $433,000,
or 7.2%, to $6.5 million, compared to $6.0 million in the same period in 2001.
The increase in service revenue is a direct result of an increase in the number
of training and professional services sold through the Company's expanded
customer base during 2002, which resulted in approximately $250,000 in
additional revenue. Avatech's training and technical support services have
received additional sales focus as Avatech transitions to a full solution,
service provider of software and services for its customers.
Commission revenue for the year ended June 30, 2002 increased
$512,000, or 11.8%, to $4.8 million, compared to $4.3 million in the same period
in 2001. The increase in commission revenues resulted from Avatech's realigned
sales organization, which has improved sales to major accounts that provide for
commission revenue.
COST OF REVENUES AND EXPENSES
COSTS OF REVENUE
Cost of product sales for the year ended June 30, 2002 decreased $1.8
million, or 12.5%, to $12.5 million, compared to $14.2 million for the same
period in 2001. Cost of product sales as a percentage of related revenue for the
year ended June 30, 2002 decreased to 67.4% from 69.5% in the same period in
2001. The decrease in cost of product sales as a percentage of related revenues
is attributed to an increase in sales of high margin software products.
Cost of service revenue for the year ended June 30, 2002 decreased
$41,000, or 1.1%, to $3.8 million compared to $3.8 million for the same period
in 2001. Cost of service revenue as a percentage of related revenue for the year
ended June 30, 2002 decreased to 58.2% from 63.0% in the same period in 2001.
The decrease in cost of service revenue as a percentage of revenues is
attributed to enhanced efforts to sell higher margin training and professional
services rather than lower margin installations of hardware products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the year ended June
30, 2002 increased $1.3 million, or 11.2%, to $12.8 million, compared to $11.5
million for the same period in 2001. Selling, general and administrative expense
as a percent of total revenues was 43.0% during the year ended June 30, 2002,
and 37.3% during the same period in 2001. The increase in selling, general and
administrative expense is attributable to the expansion of Avatech's sales force
and technical support staff in its existing locations, as well as the costs
associated with opening three new offices in Chicago, IL, St. Paul, MN, and
Tampa, FL, during the third and fourth quarters of 2001. Avatech's sales force
and support staff increased by approximately 15 employees in 2002 resulting in
an approximate $1.0 million increase in selling, general and administrative
expense. New facilities costs attributed to a $50,000 increase in selling,
general and administrative expense during the same period.
- 18 -
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the year ended June 30, 2002
decreased $105,000 or 15.1%, to $589,000, compared to $695,000 for the same
period in 2001. Depreciation and amortization expense of property and equipment
decreased as a result of capital expenditures for computer equipment and
software made in 1999 becoming fully depreciated in 2001.
GOODWILL IMPAIRMENT
For the year ended June 30, 2002, Avatech recorded an impairment
charge for the write down of unamortized goodwill to its net realizable value.
The impairment charge was recorded in the third quarter of 2002 upon the
recognition of an impairment indicator. During the period, Avatech evaluated
goodwill for its past business combinations by comparing its best estimate of
undiscounted future cash flows with the carrying value of goodwill. As the
carrying value of goodwill exceeded the estimate of undiscounted future cash
flows for one of these acquired companies, a discounted cash flow analysis was
performed which attributed to the goodwill impairment charge of $283,000 or the
amount by which the carrying value exceeded the fair value of the unamortized
goodwill balance at that time.
OTHER INCOME (EXPENSE)
Other expense for the year ended June 30, 2002 decreased $66,000, or
13.5%, to $426,000, compared to $492,0000 for the same period in 2001. The
reduction in other expense in 2002 is primarily attributable to a reduction in
interest expense resulting from a decrease in the variable interest rate
associated with the revolving line-of-credit.
INCOME TAX BENEFIT
In 2002, Avatech recorded an income tax benefit of $285,000. This
benefit includes current income tax expense of $88,000 for state income taxes
and a deferred tax benefit of $373,000. The deferred tax benefit of $373,000 is
the result of a change in the estimate of the amount of net operating loss
carryforwards that will likely be used to reduce 2003 income taxes. This
estimate was revised principally because Avatech recorded a $1.96 million gain
from the extinguishment of certain debt in August 2002, which will increase 2003
taxable income.
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
REVENUES
Total revenues for the year ended June 30, 2001 decreased $2.3
million, or 6.9%, to $30.9 million compared to $33.2 million in the same period
in 2000. For the year ended June 30, 2001, revenues in two of the three
categories--product sales and service revenue--decreased as a result of the
general economic slowdown experienced in the forth quarter of fiscal 2000 as
well as the culmination of the Y2K technology spending. Additionally, the sales
cycle for Autodesk's most popular CAD software product concluded in February
2000, which contributed to the overall decline in product sales for fiscal 2001.
While revenues declined for the year ended June 2001, the gross margin
percentage increased to 41.5% in 2001 from 37.0% in 2000 principally due to
Avatech's strategic decision to discontinue reselling the low margin hardware
products and focus on selling higher margin software products on both a direct
and agency basis.
Product sales for the year ended June 30, 2001 decreased $1.9 million,
or 8.7%, to $20.5 million, compared to $22.4 million in the same period in 2000.
The decrease in product sales is attributed to the culmination of the Y2K
technology spending and the conclusion of the sales cycle for Autodesk's most
popular CAD software product in February 2000. Additionally, Avatech made a
strategic decision to discontinue reselling the low margin hardware products and
focus on selling higher margin software products. As a result, Avatech
experienced a $1.9 million, or 66.8%, decline in hardware sales.
- 19 -
Service revenue for the year ended June 30, 2001 decreased $1.5
million, or 19.5%, to $6.0 million, compared to $7.5 million in the same period
in 2000. The decrease in service revenue is primarily attributed to a $829,000,
or 17.5%, reduction in training service revenue in 2001. The decline is service
revenue is a result of limited resources available to focus on selling training
services. During fiscal 2000, Avatech experienced exceptional results from
training services due to intense promotional efforts and sales force focus.
These efforts were not sustained in 2001 due to the implementation of certain
cost containment measures. Additionally, support services revenue for the year
ended June 30, 2001 decreased $348,000, or 18.9%, due to changes associated with
the strategic decision to discontinue selling hardware.
Commission revenues for the year ended June 30, 2001 increased $1.1
million, or 35.4%, to $4.3 million compared to $3.2 million in the same period
in 2000. The entire increase in commission revenue during 2001 resulted from the
integration of past business combinations, which provided Avatech with the
national network to service and sell to major accounts.
COST OF REVENUE AND EXPENSES
COST OF REVENUE
Cost of product sales for the year ended June 30, 2001 decreased $2.0
million, or 12.2%, to $14.2 million compared to $16.2 million for the same
period in 2000. Cost of product sales as a percentage of related revenue
decreased to 69.5% in 2001 from 72.3% in 2000. The decrease in cost of product
sales as a percentage of revenues is attributable to the application of
earn-backs and other rebates received from Autodesk as a result of Avatech
achieving its sales quotas in fiscal 2001. These earn-backs and rebates are
offset against cost of product sales in the period in which they are earned.
Cost of service revenue for the year ended June 30, 2001 decreased
$851,000, or 18.2%, to $3.8 million compared to $4.7 million for the same period
in 2000. Cost of service revenue as a percentage of related revenue remained
relatively constant at 63.0% in 2001 in comparison to 62.0% in 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the year ended June
30, 2001 decreased $1.4 million, or 10.8%, to $11.5 million, compared to $12.9
million for the same period in 2000. Selling, general and administrative expense
as a percent of total revenues was 37.3% in 2001 compared to 39.0% in 2000. The
reduction in selling, general and administrative expense in 2001 is attributable
to an expense reduction program that was implemented in the fourth quarter of
2000. The expense reduction program coupled with a 6.9% decrease in total
revenues attributed to the favorable decline in the ratio of selling, general
and administrative expenses to revenues for the year ended June 30, 2001 in
comparison to the year ended June 30, 2000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the year ended June 30, 2001
increased $3,000, or 0.3%, to $695,000 compared to $692,000 for the same period
in 2000. Depreciation and amortization expense for 2001 remained consistent with
2000 as few additions to property and equipment were needed.
OTHER INCOME (EXPENSE)
Other expense for the year ended June 30, 2001 decreased $211,000, or
30.0%, to $492,000 compared to $703,000 for the same period in 2000. The
reduction in other expense is primarily attributable to a decrease in interest
expense of 13.6% or $87,000 in 2001. The reduction in interest expense is a
result of refinancing of Avatech's revolving line-of-credit to provide for a
lower interest rate.
- 20 -
LIQUIDITY AND CAPITAL RESOURCES
Historically, Avatech has financed its operations and met its capital
expenditure requirements primarily through cash flows provided by operations and
borrowings under short-term and long-term debt arrangements. Avatech had a
deficiency of working capital of $3.3 million at December 31, 2002. Current
liabilities include $1.4 million of borrowings under a line-of-credit from a
senior lender as well as $248,000 of subordinated notes and a $500,000 note
payable to a related party. In October 2000, Avatech entered into a $4.0 million
revolving line-of-credit agreement with a senior lender that was to expire in
October 2003, but was payable within 60 days of demand. Borrowings under the
line-of-credit bore interest at the senior lender's prime rate plus 1.5%. The
amount of outstanding borrowings was limited to 75% of eligible accounts
receivable.
Avatech expects to enter into a new revolving line of credit agreement
with another senior lender and terminate the old line of credit arrangement in
March 2003. The terms of this new credit facility are essentially the same as
the old one, except that the maximum borrowings under the line of credit are
$2.5 million and the rate of interest on outstanding amounts is the senior
lender's prime rate, plus 2%, with a minimum of 7.5%.
In January 1999, Avatech borrowed $3.0 million from a junior lender.
In August 2002, Avatech executed an agreement to extinguish the debt for a cash
payment of $1.0 million and compliance with certain non-financial covenants.
Avatech borrowed $500,000 from each of PlanetCAD and James Hindman, an Avatech
director, to make the cash payment. On November 19, 2002 the merger with
PlanetCAD was completed and the loan from PlanetCAD eliminated, as Avatech
became a subsidiary of PlanetCAD. Mr. Hindman's loan matures on July 1, 2003.
The loan bears simple interest at a rate of 15.0% on outstanding principal
balance of the loan and is subordinate to Avatech's senior lender.
Avatech also had outstanding $1.8 million of 10% subordinated notes.
The notes were to mature on July 1, 2003 and interest was payable quarterly
until maturity or prepayment. On November 19, 2002 with the completion of the
merger with PlanetCAD, subordinated noteholders owning an aggregate of $1.5
million of subordinated notes exchanged their notes for preferred stock. As a
result of these exchanges, Avatech's liabilities at November 19, 2002 have been
reduced by $1,525,000, and interest expense is expected to be reduced by
$152,500 per year.
For the six months ended December 31, 2002 Avatech used $0.1 million
of cash in its operations. For the comparable six-month period in 2001, Avatech
generated $0.9 million of cash from its operations. Cash flow from operations
before working capital changes was a deficit of $0.8 million for the six months
ended December 31, 2002. Avatech's operating assets and liabilities consist
primarily of accounts receivable, accounts payable, and inventory. Changes in
these balances are affected by the timing of sales and investments in inventory
based on expected customer demand. Inventory levels are minimized through
arrangements with suppliers to ship products with an average delivery period of
two days and centralized inventory management.
For the six-month period ended December 31, 2002, cash flows from
operations was positively affected by decreases in accounts receivable of $0.4
million. Accounts receivable, net of allowance for doubtful accounts, decreased
approximately 15.4% for the period ended December 31, 2002. Day sales
outstanding (DSO's) in receivables increased to 70 days as of December 31, 2002
from 49 days as of December 31, 2001. The increase in DSO's is attributable to
the weak economic conditions, and the merger with PlanetCAD, which had DSO's of
95 days as of December 31, 2002. The decrease in the accounts receivable balance
is primarily attributable to lower sales in December 2002 due economic weakness
and the timing of product upgrade cycles. The Company's customary collection
terms range from 30 to 60 days for all of its customers.
Avatech's investment activities consist principally of investments in
computer and office equipment. Avatech acquired $76,000 of fixed assets during
the six months ended December 31, 2002. Avatech has no outstanding purchase
commitments at December 31, 2002, and expects total fixed asset purchases in
2003 to be less than $0.4 million.
As described more fully above, Avatech's financing activities in all
periods have consisted principally of borrowings and repayments under its lines
of credit. Net borrowings under lines of credit were $11,000 for the six months
ended December 31, 2002. At January 31, 2003, Avatech had additional borrowing
availability under its line of credit of $0.6 million.
- 21 -
As of March 10, 2003, Avatech and PlanetCAD had unpaid expenses due to
professional firms totaling approximately $550,000 that were incurred in
connection with the merger completed on November 19, 2002. Management believes
that these fees are excessive and plans to vigorously negotiate the amounts due
and related payment terms with all of the service providers. It is believed that
the Company will be successful in negotiating reduced fees and extended payment
terms.
Because of the demand provisions of the line-of-credit and the lending
agreement and uncertainties surrounding the Avatech's ability to obtain the
needed cash, there would be substantial doubt about the ability of Avatech to
continue as a going concern if the lenders exercise their demand rights under
the agreement. Although management cannot control the actions of these lenders,
it believes that they will not demand repayment of outstanding borrowings in the
next 12 months. One of the Company's directors has expressed his intention of
lending the Company, up to $500,000, to fund any needed working capital
deficiencies. Based on an evaluation of the likely cash generated from
operations in the near term, available capital resources and the timing of cash
payments to vendors, management believes that it has sufficient sources of
working capital to fund its operations in the normal course of business through
at least June 30, 2003. The Company has engaged an investment banking firm to
assist in obtaining long-term financing. Additionally, the Company plans to
raise between $1.0 million to $2.0 million of short term financing on acceptable
terms by June 30, 2003.
Below is a summary of the Company's contractual obligations and
commitments at December 31, 2002:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------
Total 2003 2004 2005 2006 Thereafter
---------------------------------------------------------------------------------
Contractual Obligations
Long-term debt $ 748,388 $ -- $ 748,388 $ -- $ -- $ --
Operating leases 2,715,122 1,040,785 643,170 386,361 329,885 314,921
---------------------------------------------------------------------------------
Total obligations $ 3,463,510 $ 1,040,785 $ 1,391,558 $ 386,361 $ 329,885 $ 314,921
=================================================================================
FINANCING ARRANGEMENTS WITH CIT
Under the CIT Revolving Line of Credit Agreement, Avatech obtained a
3-year revolving line of credit with the CIT Group/Business Credit, Inc. ("CIT")
in an amount up to $4,000,000. In consideration for granting the line of credit,
Avatech granted to CIT a warrant to purchase up to 16,213 shares of its voting
common stock at an exercise price of $.01 per share. The warrant expires on
October 25, 2003. Avatech also granted CIT certain registration and other rights
(including but not limited to drag-along rights and tag-along rights) pursuant
to that certain Warrantholders Rights Agreement of the same date.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial
information for each of the eight quarters in the two years ended June 30, 2002.
Management believes that this information has been prepared on the same basis as
the audited consolidated financial statements appearing elsewhere in this
Prospectus and, in managements opinion, this information includes all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the unaudited quarterly operating results when read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto appearing elsewhere in this Prospectus. These operating
results are not necessarily indiciative of results for any future period.
- 22 -
Three Months Ended
--------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, Jun. 30,
2000 2000 2001 2001
--------------------------------------------------------
Revenues $ 7,537,928 $ 7,487,901 $ 8,007,077 $ 7,838,572
Cost of sales 4,705,999 4,505,066 4,713,387 4,138,653
Gross margin 2,831,929 2,982,835 3,293,690 3,699,919
Operating income (179,088) 177,468 353,272 243,019
Net income $ (304,989) $ 48,277 $ 234,113 $ 111,935
========================================================
Earnings (loss) per
share - basic and
diluted $ (0.14) $ 0.02 $ 0.11 $ 0.05
========================================================
Shares used in
computation 2,193,902 2,233,778 2,227,754 2,227,388
========================================================
Three Months Ended
-------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, Jun. 30,
2001 2001 2002 2002
-------------------------------------------------------
Revenues $ 7,529,009 $ 7,594,629 $ 8,102,625 $ 6,586,324
Cost of sales 4,295,779 4,113,712 4,318,174 3,510,341
Gross margin 3,233,230 3,480,917 3,784,451 3,075,983
Operating income (271,266) 275,965 (74,667) (36,455)
Net income $ 37,890 $ 161,685 $ (192,190) $ (254,880)
=======================================================
Earnings (loss) per
share - basic and $ 0.02 $ 0.07 $ (0.09) $ (0.11)
diluted =======================================================
Shares used in 2,226,677 2,223,595 2,221,973 2,220,670
computation ======================================================
The Company's operating results may vary significantly from quarter to
quarter due to a variety of factors. One such significant factor is the
potential fluctuation in revenues due to seasonality of the business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Avatech is exposed to market risk from changes in interest rates
associated with its variable rate line-of-credit facility. At December 31, 2002,
approximately 65.7% of its outstanding debt bears interest at variable rates.
Accordingly, Avatech's earnings and cash flow are affected by changes in
interest rates. Assuming the current level of borrowings at variable rates and a
100 basis point change in the 2002 average interest rate under these borrowings,
it is estimated that Avatech's 2002 interest expense and net income would change
by less than $20,000. In the event of an adverse change in interest rates,
management would likely take actions to further mitigate its exposure. However,
due to the uncertainty of the actions that would be taken and their possible
effects, the analysis assumes no such actions. Further the analysis does not
consider the effects of the change in the level of overall economic activity
that could exist in such an environment.
CHANGES IN AND DISAGREEMENTS WITH AVATECH'S ACCOUNTANTS
In May 2002, the management of Avatech Solutions, Inc. engaged Ernst &
Young LLP as their independent auditors for the year ended June 30, 2002 in
anticipation of our becoming a public registrant. Our board of directors
ratified this engagement of Ernst & Young LLP effective May 28, 2002. During the
2002 fiscal year and through the date of this report, there were no
disagreements with Ernst & Young on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedures which,
if not resolved, would have caused them to make reference to the subject matter
in connection with their report on our consolidated financial statements for
such year. Ernst & Young LLP's report on our financial statements for the past
year did not contain an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting principles.
Additionally, there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
Walpert & Wolpoff, LLP had been engaged to audit our consolidated
financial statements for the fiscal years ended June 30, 2001 and 2000. During
these two fiscal years and through the date of this report, there were no
disagreements with Walpert & Wolpoff on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedures which,
if not resolved, would have caused them to make reference to the subject matter
in connection with their report on our consolidated financial statements for
such years. Neither of Walpert & Wolpoff, LLP's reports on our financial
statements for either of the past two years contained an adverse
- 23 -
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles. Additionally, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
KPMG, LLP had been engaged to audit the financial statements of
PlanetCAD, Inc, which merged with us effective November 19, 2002, for the years
ended December 31, 2001 and 2000. During these two fiscal years and through the
date of this report, there were no disagreements with KPMG on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedures which, if not resolved, would have caused them to make
reference to the subject matter in connection with their report on PlanetCAD's
financial statements for such years. Neither of KPMG's reports on PlanetCAD,
Inc's financial statements for either of the past two years contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles. Additionally, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
BUSINESS
BACKGROUND
Avatech was formed as a Delaware corporation on September 9, 1996. On
June 20, 1997, CADWORKS, Inc., a company conducting its operations principally
in Texas providing design automation software, training, technical support and
professional services to corporations, was merged into Avatech, with such merger
being accounted for as a recapitalization. On June 30, 1997, Premier Design
Systems, Inc., a company with similar operations principally in Maryland, was
merged with a wholly-owned subsidiary of Avatech in a business combination
accounted for as a pooling-of-interests. All outstanding common stock of
CADWORKS, Inc. was exchanged for 593,525 shares of voting common stock of
Avatech. All outstanding common stock of Premier Design Systems, Inc. was
exchanged for 665,575 shares of our voting common stock.
During fiscal years 1998 through 1999, we consummated business
combinations with nine companies that provided design automation software,
training, technical support, and professional services to corporations,
government agencies, and educational institutions throughout the United States.
Seven of the business combinations were each consummated by the exchange of all
of the outstanding shares of voting common stock of the acquired company for
shares of our voting common stock and were accounted for as
pooling-of-interests. Two of these business combinations were accounted for as
purchases.
Our executive offices are located at 11403 Cronhill Drive, Suite A,
Owings Mills, Maryland 21117, and our telephone number is (410) 902-6900.
INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies in diverse industries to increase efficiencies while improving
flexibility and responsiveness to changing market conditions. In addition to
facing higher competitive standards with respect to product quality, variety and
price, businesses also recognize the need to shorten lead times, adjust
production for frequent changes in customer requirements, and quote more
accurate and reliable delivery dates. Furthermore, a company's trading network
may span multiple continents, requiring suppliers in one part of the world to
collaborate with a plant in another. These forces are prompting companies to
collaborate with technology transparency, across a broad range of suppliers and
customers to improve efficiencies within multi-enterprise value chains and
market places.
The development and proliferation of communications, desktop
automation, and software applications, including applications for specific
industry focuses such as AEC, Mechanical Design, GIS, and Facilities Management
are accelerating many companies' efforts to increase efficiencies by enabling a
platform-independent communications network. This platform independence and
demand for interoperability has prompted demand for a dynamic, open, and
integrated environment among customers, suppliers, and designers. In response to
these evolving market forces, many companies are seeking business solutions that
include re-engineering their business process to reduce manufacturing cycle
times, shifting from mass production to order-driven manufacturing,
- 24 -
increasing the use of outsourcing, and sharing information more readily with
vendors and customers over the Internet.
GENERAL
We are a leading provider of design automation and quality assurance
solutions for the manufacturing, building design, civil engineering, and GIS
markets. We specialize in software development, technical support, training, and
consulting aimed at improving design and documentation efficiencies and the
seamless integration of workflow processes. Our sales are to corporations,
government agencies, and educational institutions worldwide.
Our product sales are primarily the resale of packaged design software
programs that are installed on a user workstation, on a local area network
server, or in a hosted environment. The programs perform and support a wide
variety of functions related to design, modeling, drafting, mapping, rendering,
and facilities management tasks. We are one of the largest domestic commercial
reseller of design software developed by Autodesk, Inc. (Autodesk), one of the
world's leading design software and digital content companies for the building
design and land development, manufacturing, utilities, telecommunications, and
media and entertainment industries.
We differentiate ourselves from traditional product resellers through
the wide range of value-added services we can provide as part of an overall
business solutions engagement. Our services are structured around three areas:
training, technical support, and professional services--and are often bundled
with the associated software products that support them. Education classes are
offered through Our 30 training classroom facilities or directly at a customer
site, and include basic through advanced product training and customized
company-specific training curriculum. Our instructors are application engineers
and product specialists who have formal training or industry experience in the
course content. Technical support services are provided primarily through our
telephone support center located in Omaha, Nebraska. Through our staff of full
time consultants, we provide assistance to customers with questions or issues
concerning the suite of software products we resell, and those associated with
the professional services engagements we perform. Professional services include
project-focused offerings that are fulfilled primarily with our own application
engineers and programmers and include software customization, data migration,
computer aided design standards consulting, workflow analysis, and
implementation assistance for complex software products. Our strategic focus is
in responding to our customers' requests for interoperability and product
lifecycle management solutions that address broader, enterprise-wide
initiatives.
More than 90% of our total revenue arises from the resale of
Autodesk's software, and the delivery of related services from the sales of
these products. We are required to enter into annual channel partner agreements
with Autodesk and other software developers that we represent. These agreements
grant us authorization to sell certain software products to certain customers in
certain geographic areas of the United States. There are no clauses in these
agreements that limit or restrict the services that we can offer to customers.
We have a national sales and service delivery network of approximately
180 personnel operating out of 21 business offices across the country. Our sales
database has over 180,000 point-of-contact names collected over a 15-year time
span, and an active customer list of approximately 20,000 firms, and federal,
state and local agencies.
We own, market, and support cycle time reduction software solutions
that integrate engineering processes and data for the manufacturing supply
chain. We operate predominantly in the manufacturing industry with special focus
on the computer-aided design (CAD), manufacturing (CAM) and engineering (CAE)
markets.
These software tools and applications enhance the value of engineering
data in the manufacturing design and procurement supply chain by enabling cycle
time reduction. During the traditional manufacturing process, if the supply
chain manufacturer receives a product's specifications and design
electronically, important data may be lost if the supply chain manufacturer does
not use the same software application as used by the data originator. In that
event, a sample manufactured product is provided to the end-user or OEM for
approval or modification. If the sample does not meet the end-user's or OEM's
specifications, it must be modified by the supply chain manufacturer and sent
again for approval or modification. This process is often repeated several times
and is costly. "Cycle time" is a term used to describe the cycle of
trial-and-error iterations it takes for the supply chain manufacturer to produce
an end product satisfactory to the end-user or OEM. Our cycle time reduction
solutions enhance engineering processes and reduce product time-to-market by
addressing product data quality, communication, and downstream
- 25 -
data interoperability. These include, but are not limited to, computer-aided
design, data translation and data movement and data tracking solutions that
enable communication of engineering data with varying formats and precision, and
data quality assurance tools that improve design quality and reduce or even
eliminate iterations from electronic design to the finished product meeting the
electronic design standards.
The technology and products we acquired in our merger with PlanetCAD
are based on JAVA, which is a cross-platform, highly-scalable, and
internet-enabled development software programming platform. These JAVA-based
technologies and products enable efficient engineering information exchange and
integration for professional manufacturing and design engineers worldwide.
Engineers and managers can benefit from lower costs of production and
accelerated introduction of products to market.
Our enterprise software products include PrescientQA(TM) and our new
SCS|Envoy(TM) supply chain solution software. PrescientQA(TM) is quality
assurance software that detects, assesses, corrects, and even prevents product
development problems caused by modeling practices that are inaccurate,
incomplete, inconsistent, or all three. These problems, generally undetected,
account for approximately 45% of the engineering change orders in a typical
organization. Prescient technology is the only quality assurance solution that
works across multiple CAD systems, including CATIA(R), Pro/Engineer(R),
Unigraphics(R), and Autodesk Inventor(R), with a single reporting and
configuration system.
SCS|Envoy is a new line of solutions for automating the distribution
of disparate data and enabling secure, rapid, and automated communication of
product data throughout the supply chain, resulting in more productive and
efficient manufacturing operations. In addition, we offer professional services
that help implement a transparent integration of cycle time reduction solutions
with existing manufacturing systems in corporate product design and production
processes.
We believe that PLM software and services represents a significant
opportunity for future growth. Our relationship with EDS, which we expect to
result in the execution of a Certified Reseller Agreement in the Spring of 2003,
will not only provide us with a new potentially significant new product line,
but will also permit us to expand our higher margin services business and
significantly increase the average size of sales transactions. PLM software
significantly enhances manufacturing efficiencies and permits manufacturers to
manage products through their active lifecycles.
MARKETS
The AEC market is comprised of design services focused on the
construction of large physical assets such as buildings, roads, factories,
utility companies, and commercial infrastructure projects. Architects, builders,
and civil engineers use design automation systems to create detailed three
dimensional construction drawings, material specifications, and maintenance
records. Digital files are created and shared by multiple architects, engineers,
and suppliers of services and raw materials throughout the construction schedule
and subsequent operations of the asset.
The Mechanical Design and Manufacturing market is primarily focused on
the design, tooling, assembly, and testing of instruments, electronic devices,
machines, mechanical devices, and power-driven equipment. Inventors, engineers,
technicians, and designers use design automation software as basic tools in the
overall form, fit and function, creation, and refinement of the product or item.
Given the physical and electronic complexity of most items invented today,
software and services are critical to achieving tight production schedules and
cost targets.
EDM systems provide methodical and organized processes involved with
the storage, retrieval, management, and versioning of design files, drawings and
related documents such as customer correspondence, inventory lists, digital
images, and other items. These products are based on a client/server
architecture, and are scalable from a departmental solution to a division level
infrastructure system.
GIS software permits users to link together disparate data files
(maps, aerial photos, tax records, marketing data, etc.) and provide the user
with a unified image and knowledge base of a specific geographic location or
building location. This software can also be used to develop emergency exit and
disaster rescue plans by providing
- 26 -
detailed information about employee locations, communication information,
distances to the closest stairwells, and elevators, fire hose connection points,
etc. New technology based on powerful desktop computer hardware has enabled
software developers to offer products that are easier to use and less expensive
than the previous applications, thus expanding the volume of purchases,
installation, and level of usage from the traditional civil engineering,
utilities, public works, and transportation logistics markets and into the
emergency services and Homeland Security segments.
Facilities Management applications enable facility managers and
physical plant staff to efficiently operate and utilize all aspects of a
facility's operational systems (heating, cooling, power, communications,
security, etc.) including its internal and external space and infrastructure.
When integrated with Internet browsers, GIS, and document management tools,
users are able to have substantial knowledge about their buildings, their
neighborhoods, and their documents, which leads to better effectiveness and cost
containment.
As a result of our merger with PlanetCAD, we develop, market, and
support cycle time reduction software solutions that integrate engineering
processes and data for the manufacturing supply chain. We operate predominantly
in the manufacturing industry with special focus on the computer-aided design
(CAD), manufacturing (CAM), and engineering (CAE) markets.
We provide software tools and applications that enhance the value of
engineering data in the manufacturing design and procurement supply chain by
enabling cycle time reduction. During the traditional manufacturing process, if
the supply chain manufacturer receives a product's specifications and design
electronically, important data may be lost if the supply chain manufacturer does
not use the same software application used by the data originator. In that
event, a sample manufactured product is provided to the end-user or OEM for
approval or modification. If the sample does not meet the end-user's or OEM's
specifications, it must be modified by the supply chain manufacturer and sent
again for approval or modification. This process is often repeated several times
and is costly. "Cycle time" is a term used to describe the cycle of
trial-and-error iterations it takes for the supply chain manufacturer to produce
an end product satisfactory to the end-user or OEM. Our cycle time reduction
solutions enhance engineering processes and reduce product time-to-market by
addressing product data quality, communication, and downstream data
interoperability. This includes, but is not limited to, computer-aided design,
data translation, and data movement and tracking that enables communication of
engineering data with varying formats and precision and data quality assurance
tools that improve design quality and reduce or even eliminate iterations from
electronic design to the finished product meeting the electronic design
standards.
Product Lifecycle Management (PLM) software solutions are expected to
be a significant new tool for manufacturers in multiple vertical industries over
the next decade. According to AMR Research, the PLM software market was $2
billion in 2001 and will grow to nearly $8 billion by 2006. We believe that our
newly created relationship with Unigraphics, a subsidiary of EDS, pursuant to
which we expect to become an EDS Certified Reseller, will provide us with
important product diversity consistent with our new strategy of increased
investment in people, diversification of product and service offerings, and a
targeted merger and acquisition program to expand our geographic footprint.
SOLUTIONS AND PRODUCTS
As a design automation company, we sell software packages developed by
third party software developers. We provide a variety of services to assist our
customers in maximizing the benefits from these software applications. These
services include training, technical support, and professional services.
Our product sales are primarily composed of packaged software programs
that are installed on a user workstation, on a local area network server, or in
a hosted environment. The programs perform and support a wide variety of
functions related to design, drafting, manufacturing, workflow automation, and
document management activities. Product offerings include a full range of design
automation software packages from the industry leader, Autodesk, and workflow
and document management software from Cyco, Inc.
Training Services. We have a curriculum of over 30 different subjects
offered at our 30 training facilities, and through mobile labs that we can send
to a customer site. Our employees serve as class instructors and have formal
training or successful industry experience in the topics they are teaching. All
instructors must take and pass
- 27 -
annual subject-matter exams required by Autodesk and other software providers to
retain their product-based teaching certifications. We also provide training
services that are highly tailored to meet the needs of a particular customer,
including company-specific operational topics, customized product usage, and
other general technology or process training.
Technical Support Services. We provide end-user and corporate
technical support services through our National Support Center (NSC) located in
Omaha, Nebraska. A staff of full-time product and technology consultants assists
customers calling with questions about product features, functions, usability
issues, and configurations--as well as from our professional services
engagements. The NSC offers services through multiple access levels including
prepaid services, actual elapsed time, and annual support contracts. Customers
can communicate with the NSC through e-mail, telephone, and fax channels.
Standard NSC support services are offered on a 12-hour by 5-day basis, with
premium pricing for extended coverage hours.
Professional Services. Professional Services are project-focused
offerings that include software customization, data migration, computer aided
design standards consulting, supplemental staffing for design work, drawing
digitization, symbol library development, and GIS database development. We also
provide technology interoperability, engineering collaboration, and workflow
improvement solutions with design automation and manufacturing organizations.
CHANNEL SALES AGREEMENT WITH AUTODESK, OUR LARGEST VENDOR, PROPOSED RESELLER
AGREEMENT WITH EDS.
Our revenues are primarily derived from the resale of vendor software
products and services. These resales are made pursuant to channel sales
agreements whereby we are granted authority to purchase and resell the vendor
products and services. Under these agreements, we either resell software
directly to our customers or act as a sales agent for various vendors and
receive commissions for our sales efforts. We entered into an Authorized Channel
Partner Agreement with Autodesk, Inc. whereby Autodesk appointed us as a
non-exclusive partner to market, distribute, and support Autodesk software
products. Collectively with our subsidiaries, we must achieve a yearly minimum
revenue in the amount of $300,000 from the sale of Autodesk's software products
in order to be eligible to purchase such products directly from Autodesk. This
Agreement expired on January 31, 2003, and we are in the process of negotiating
modifications to the standard Channel Partner Agreement with Autodesk.
We have reached an agreement principal with EDS whereby we will become
a Certified Reseller of EDS' PLM software solution. The terms of this Agreement
have not yet been finalized.
SALES AND MARKETING
Our merger and acquisition growth strategy, coupled with post merger
marketing efforts, has provided us with a sales database of over 180,000
point-of-contact names and an active customer base of 18,000 organizations.
We sell software products and solutions services through a direct
sales organization consisting of sales representatives, many with engineering
degrees and industry experience, and pre-sales technical consultants. Many of
our customers were successfully transitioned from acquired companies, as
dedicated sales representatives worked diligently to retain their customer
relationships.
We utilize a customer relationship system (CRM) to manage customer
communications that is deployed at all offices via a wide-area network. We also
use a sophisticated electronic marketing system for permission-based, automated,
one to one marketing communications and regular electronic publications. The
features include automatic customized e-mail messages to prospects with interest
in our products and services and automated lead distribution directly to the
sales force. In addition, we have a comprehensive and scaleable website, which
supports secure transactions and serves streaming media demonstrations and
technical tips on a 24x7 on-demand basis.
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CUSTOMERS
We market our products to private companies, public corporations,
government agencies, and educational institutions throughout the United States.
In fiscal year 2002, the revenues generated by our top 10 customers represented
approximately 5% of total revenues.
We have a national sales and service delivery network that is
comprised of 20 business offices and 30 training classrooms across the country.
Our customers include:
AOL Time Warner Communications AT&T Baltimore Gas & Electric
Baseland Bechtel Becton Dickenson
Bell Atlantic Bouck & Lee Engineers Caterpillar
Champion Industries City of Baltimore City of Roseville, CA
Colorado Springs Utilities Consumers Energy Dewberry & Davis
Ford Motor Company General Electric General Mills
Goodyear Hellmuth, Obata & Kassabaum, Inc. Honeywell
INTEL JCPenney John Deere
Johnson & Johnson Kimley-Horn & Associates Lucent Technologies
MBNA Media One Michigan Department of Transportation
Naptheon NASA National Park Service
Nestle Nolte Engineering Norfolk Naval Air Station
Oceana Naval Base Ozark Aircraft Pacific Bell
Parker Hannifan Parsons Brinckerhoff Quade &Douglas, Inc. Pioneer Hybrid
Qwest Communications Rockwell Royal Caribbean International
RTKL Associates Sacramento Regional Transit SBC
Siemens Siemens Medical Systems Texaco
Texas Instruments The Sports Authority Trane
Union Pacific URS Greiner US Bureau of Land Management
Verizon
COMPETITION
We compete in the design automation channel, a market historically
composed of small niche, regionally focused companies. Since we began operations
in 1997, the Autodesk reseller channel has changed radically. The number of
Autodesk channel participants has declined significantly from approximately 400
at the time of our formation to approximately 200 currently. The many new
products and their increased complexity have made it very difficult for small
companies to compete. The vast majority of smaller resellers lack the technical
talent, financial resources, and business management skills to transition from
the old, single-application product model to one offering complete solutions.
While several, small, reseller competitors exist in the various
geographic territories where we conduct business, we have a competitive
advantage in terms of geographic reach, comprehensive training and support and
the provision of other products and services. We are the largest commercial
Autodesk reseller in the United States. Two national competitors that could be
compared to us in scale, size, geographical reach and target markets for the
resale of Autodesk products; INCAT International, Inc. (INCAT) and RAND A
Technology Corporation (RAND).
INCAT is a systems integrator for design automation products. They
have 30 offices in nine countries with worldwide headquarters in the United
Kingdom. They have 15 offices in the United States. They have approximately 800
employees worldwide with approximately 65 percent in consulting, design
engineering and technical support. While INCAT is larger than Avatech, we
estimate that the Autodesk portion of its business is less than one-fourth as
large as our Autodesk business.
RAND is the largest computer-aided design and engineering technology
company worldwide. However, we estimate that its Autodesk related business is
less than fifty percent as large as ours. It operates in 104 offices located
- 29 -
in 27 countries with headquarters in Canada. It has 38 offices in the United
States. As of December 31, 2001, it reported having over 1,200 employees
worldwide.
INTELLECTUAL PROPERTY
We regard our technology and other proprietary rights as essential to
our business. While we rely on copyright, trade secret, confidentiality
procedures, contract provisions, and trademark law to protect our technology and
intellectual property, we believe that the technological skills of our employees
and reliable service maintenance are also critical to establishing and
maintaining an intellectual property leadership position. We own a number of
federal trademarks, including "AVATECH SOLUTIONS," "AVANEWS," and "PRESCIENT
QA," and have no trademark applications pending. We have no patents or patent
applications pending. We acquired a number of other trademarks as a result of
our merger with PlanetCAD.
We have entered into confidentiality agreements with our employees,
consultants and corporate partners and intend to control access to, and
distribution of our products, documentation and other proprietary information.
EMPLOYEES
As of December 31, 2002, we had approximately 170 full time employees
located in 22 offices throughout the United States. Many of our current
employees formerly were employees of the companies that we acquired.
Approximately 43 are located in Maryland where we have our corporate
headquarters, as well as two sales and training locations. Maryland is also the
location of our centralized accounting, order processing, and marketing
functions. Approximately 62 of our total work force is engaged in sales and
marketing activities, and approximately 60 employees are engaged in service
fulfillment. Our future success depends in significant part upon the continued
services of our key sales, technical, and senior management personnel and our
ability to attract and retain highly qualified sales, technical and managerial
personnel. None of our employees are represented by collective bargaining
agreements, and we have never experienced a work stoppage. We believe our
employee relations are good.
PROPERTIES
Our corporate offices are located in Owings Mills, Maryland where we
lease approximately 3,000 square feet of office space, pursuant to a lease that
expires June 30, 2003. These facilities house our executive and primary
administrative offices as well as accounting, order processing operations, IT,
and marketing. We also lease office space at the following locations:
LOCATION SQUARE FOOTAGE TERM
-------- -------------- --------------
California--Roseville................. 2,877 06/30/2003
Colorado--Englewood................... 7,250 03/31/2005
Colorado--Boulder..................... 3,720 11/1/2007
Connecticut--Milford.................. 5,342 Month to month
Florida--Sarasota..................... 2,500 7/31/2003
Florida--Tampa........................ 2,290 12/31/2003
Iowa--Cedar Rapids.................... 2,525 05/31/2003
Iowa--Clive........................... 4,310 04/30/2004
Maryland--Owings Mills................ 10,010 05/31/2004
Maryland--Rockville................... 2,616 04/01/2003
Michigan--Ann Arbor................... 5,543 02/28/2003
Minnesota--St. Paul................... 2,782 09/30/2002
Nebraska--Omaha....................... 7,150 Month to month
New Jersey--East Brunswick............ 2,000 03/31/2003
New York--Liverpool................... 2,105 05/14/2003
Texas--Austin......................... 2,125 10/31/2004
Texas--Irving......................... 10,522 12/31/2002
Virginia--Richmond.................... 2,250 03/31/2006
Virginia--Virginia Beach.............. 5,000 12/31/2002
- 30 -
Not listed are leases for space that has been vacated where the
sublessee's payments to us defray, in whole or in substantial part, our lease
payment obligations.
The commercial real estate market is volatile and unpredictable in
terms of available space, rental fees, and occupancy rates and preferred
locations. We cannot be certain that additional space will be available when we
require it, or that it will be affordable or in a preferred location
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceeding.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information, as of December 31, 2002, with respect
to the individuals who serve as our directors and executive officers. For
additional information concerning each of these directors and executive
officers, see "Security Ownership of Certain Beneficial Owners and Management"
and "Executive Compensation."
NAME AGE POSITION
- --------------------- ------ ------------------------------------
W. James Hindman 67 Chairman of the Board
Henry D. Felton 60 Vice Chairman of the Board
Donald "Scotty" Walsh 66 Chief Executive Officer and Director
Eugene J. Fischer 56 Director
James A. Fanella 44 Director
John W. Sasser 54 Director
Gary Rever 50 Chief Financial Officer
V. Joel Nicholson 60 Executive Vice President
Debra Keith 51 Senior Vice President
Scott Fischer 44 Executive Vice President
There are no family relationships among any of our directors or
executive officers.
W. JAMES HINDMAN. Mr. Hindman has been a member of the Board of
Directors of Avatech since its inception in 1997. Previously, Mr. Hindman
founded Youth Services International, Inc. and served as its Chairman of the
Board and Chief Executive Officer from 1991 to 1997. In addition, Mr. Hindman is
the founder of Jiffy Lube International, Inc. and served as its Chairman of the
Board and Chief Executive Officer from 1980 to 1989. In addition, from 1976 to
1980, Mr. Hindman was the Head Football Coach at Western Maryland College, his
alma mater. From 1967 to 1979, Mr. Hindman was involved as the founder and
President of W.J. Hindman & Associates, Inc., a real-estate development, health
care and consulting company that owned and operated 18 nursing home facilities
throughout Maryland, Iowa, Illinois and Nebraska. He has served as a member of
the boards of directors of Morningside College and the Baltimore Symphony
Orchestra.
HENRY D. FELTON. Mr. Felton has been with Avatech since its inception
in 1997 and has served as Chairman of the Board and Chief Executive Officer
since that time. He is the former Co-Founder, President and Chief Operating
Officer of Youth Services International, Inc. Previously, Mr. Felton was
Executive Vice President of Maryland National Bank and a Management Committee
member.
DONALD R. WALSH. Before joining Avatech as its CEO in December, 2002,
Mr. Walsh was the Executive Vice President of Business & Network Systems Sales
for InterVoice-Brite, Inc., a global leader in the call
- 31 -
automation industry, a position he held since August 1999. From July 1997 until
the 1999 merger of Brite Voice Systems, Inc. with InterVoice, Inc., Mr. Walsh
served as the Executive Vice President of Worldwide Sales for the Brite Voice
Systems. Before joining Brite Voice Systems, Mr. Walsh served as President of
PSC Information Services, a division of a Philadelphia suburban corporation that
provides data processing products and services. Mr. Walsh's experience also
includes 23 years of experience with IBM.
EUGENE J. FISCHER. Mr. Fischer was a director of PlanetCAD from March
2000 until its merger with Avatech, and currently serves as a director of
Avatech and a member of its Executive, Audit, and Compensation Committees. Mr.
Fischer co-founded Capstone Management LLC, a venture capital firm, in July
1995, and is an executive officer in Capstone's affiliated entities. His
investment experience includes Internet, software, health care service and other
technology-enabled service companies. Mr. Fischer holds a B.S. from the
University of Minnesota and an M.S. from the University of California, Davis.
JOHN W. SASSER. Mr. Sasser is presently self-employed and has been so
since July of 1991. From 1987 to July of 1991, Mr. Sasser was the President of
American Oil Change Corporation, a Jiffy Lube franchisee. Mr. Sasser also served
as the President of the Jiffy Lube Association of Franchisees from 1989 until
July of 1991. Previously, Mr. Sasser was the Senior Vice President and Chief
Financial Officer of Jiffy Lube International from 1984 to 1987. He currently
serves as a member of the boards of directors of the Cloisters Children's Museum
and Port Discovery, two children's museums in Baltimore, Maryland.
JAMES A. FANELLA. Mr. Fanella served as a director of PlanetCAD from
October 2001 until its merger with Avatech, and currently serves as a director
of Avatech and a member of its Audit and Compensation Committees. Mr. Fanella
recently served as Senior Vice President, Enterprise Solutions, at Yahoo!, a
position he held since August 2001. From September 2000 until July 2001, Mr.
Fanella served as a group president and general manager of global services at
CommerceOne. From November 1999 until September 2000, he served as a group
president of AppNet, Inc., which was acquired by Commerce One. From 1994 until
October 1999, Mr. Fanella was a managing principal at the Unisys Corporation.
GARY REVER. Mr. Rever joined Avatech in August 2000 as Senior Vice
President and Chief Financial Officer. He was formerly the President of
Mason-Dixon Services, LLC, a bank holding company subsidiary that provided
operational and IT services to affiliate companies from 1998 to 2000. Prior, he
has served as the Chief Financial Officer of Bank of Maryland Corporation and
Vice President of MNC Affiliates from 1981 to 1998. Mr. Rever is a Certified
Public Accountant and earned his BA in Economics at the University of Maryland.
V. JOEL NICHOLSON. Mr. Nicholson has been with Avatech since its
inception in 1997 and has served as a director and Executive Vice President
since that time. Prior to joining Avatech, Mr. Nicholson served as President of
Evergreen National Development, Inc., a start-up corporation that provided
services to client companies considering mergers, acquisitions, and other growth
options. Formerly, Mr. Nicholson was the Senior Vice President of Youth Services
International, Inc., responsible for mergers and acquisitions. During his
military career, he held various high level positions.
SCOTT FISCHER. Mr. Fischer joined Avatech in April 2002 as Senior Vice
President, Professional Services and currently serves as our Executive Vice
President--Operations. Prior to going to Avatech, Mr. Fischer was a principal in
TenX Capital Partners from June of 2001 to April of 2002. Prior, he was Vice
President and General Manager--Americas for Wireless Knowledge, a start-up
wireless technology provider from January through May of 2001. From June of 1999
through January of 2001, Mr. Fischer was a Senior Vice President of AppNet, then
Commerce One, which acquired it. Mr. Fischer was Vice President--Sales and
Marketing, General Manager, of triSpan Internet Business Solutions, of
Conshohocken, Pennsylvania from August 1998 until June of 1999, when the company
was sold. From October 1997 to August 1998, Mr. Fischer was the President of NDC
Group, a consulting company in Alexandria, Virginia. Mr. Fischer began his
career with Anderson Consulting (Accenture) where he worked until September
1997.
DEBRA KEITH. Ms. Keith joined Avatech in July of 1998 as a Sales
Manager and became Senior Vice President of Sales and Marketing in April 2002.
Prior to joining Avatech, Ms. Keith was the Sales Development Manager for
Autodesk, Inc. from December of 1994 through July of 1998. From 1979 until 1994,
Ms. Keith held
- 32 -
various management positions in Auto-trol Technology Corporation of Denver,
Colorado, including Business Unit Manager (1992 to 1994) and Senior Account
Manager (1987 to 1992).
EXECUTIVE COMPENSATION
The following table presents information concerning all compensation
earned during the three most recent fiscal years ended June 30 by our
immediately past Chief Executive Officer and four other most highly compensated
executive officers whose combined salary and bonus exceeded $100,000 for
services rendered during the fiscal years. These executive officers are referred
to as the "Named Executive Officers."
The compensation set forth in the table below does not include
medical, group life or other benefits that are available to all of our salaried
employees, and perquisites and other benefits, securities, or property that do
not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown
in the table.
SUMMARY COMPENSATION TABLE
SECURITIES
NAME AND PRINCIPAL SALARY BONUS UNDERLYING ALL OTHER
POSITION YEAR ($) ($) OPTIONS (#) COMPENSATION ($)
- ---------------------------------------- ------ ---------- ------ ----------- ----------------
Henry Felton
Vice Chairman,
Former Chief Executive Officer 2002 $ 6,079 $ -- 12,674 $ --
2001 6,121 -- 12,613 --
2000 5,765 -- 18,959 --
Gary Rever,
Senior Vice President,
Chief Financial Officer 2002 114,696 -- -- --
2001 77,000 7,000 22,320 --
2000 -- -- -- --
Joel Nicholson,
Executive Vice President 2002 127,176 -- -- --
2001 109,596 -- -- --
2000 103,596 -- -- --
Debra Keith
Senior Vice President, Sales & Marketing 2002 110,051 10,895 5,580 --
2001 84,167 25,000 3,720 --
2000 80,000 25,000 670
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock
options granted to each of the Named Executive Officers during 2002. We granted
options to purchase up to a total of 138,812 shares to employees during the
year. The table's percentage column shows how much of that total went to the
Named Executive Officers.
Number of Shares Percent of Total
Underlying Options Options Granted to Exercise Price
Granted in 2002 Employees (%) ($ / Share) Expiration Date
------------------ ------------------ -------------- ---------------
Henry Felton 12,674 9.1% $ 11.42 June 2012
Joel Nicholson -- -- -- --
Debra Keith 5,580 4.0% $ 11.42 November 2011
Gary Rever -- -- -- --
- 33 -
OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth the number of shares the Named
Executive Officers purchased in connection with option exercises during the 2002
fiscal year and the value they realized on those exercises.
Number of Securities Underlying
Unexercised Options at Fiscal Year-End
Shares Acquired on --------------------------------------
Name Exercise Value Realized Exercisable Unexercisable
------------------ -------------- ------------- ---------------
Henry Felton -- -- 44,246 --
Joel Nicholson. -- -- -- --
Debra Keith -- -- 3,918 8,283
Gary Rever -- -- 7,440 14,880
EMPLOYMENT CONTRACTS, CHANGE-IN-CONTROL AND INDEMNIFICATION ARRANGEMENTS
The executive officers serve at the discretion of our board of
directors. However, two of our executives, Donald "Scotty" Walsh and Gary Rever
(CFO), have signed employment agreements with severance provisions that provide
for specific cash compensatory arrangements to these employees in the event of a
change in control. The agreements for Messrs. Walsh and Rever provide that if
the executive's employment is terminated or substantially modified as a result
of a change in control, then the executive will receive a severance payment
equal to 12 and 18 months' base salary, respectively, then in effect and full
accelerated vesting of all unvested stock options.
Mr. Felton and Mr. Nicholson are parties to severance agreements with
us which entitle them, upon a change of control or termination of employment
without cause, to 18 months' severance pay.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
W. James Hindman currently owns approximately 2.68% of our outstanding
common stock and is the Chairman of our Board of Directors. Mr. Hindman loaned
us $500,000 in August 2002. The $500,000 loan bears simple interest at a rate of
15% per year with interest to be paid quarterly. The loan must be repaid on July
1, 2003.
Avatech began in 1996 and grew by acquiring corporations through
merger. Our stock was given to the owners of these founding companies in
exchange for the stock of the founding companies. The owners of these founding
companies became our controlling stockholders. After the PlanetCAD merger, these
founding stockholders, as a group, own approximately 32.6% of our outstanding
stock.
Henry D. Felton is currently the Vice Chairman and our immediate past
CEO. Mr. Felton owns approximately 6.6% of our outstanding stock and holds, as
of July 31, 2002, stock options and warrants to purchase up to approximately
1.72% of our stock. As our chief executive officer, Mr. Felton was issued stock
options to purchase our common stock in lieu of cash compensation. Thus, Mr.
Felton received an option each month to purchase 1,061 shares of Avatech common
stock. Each option he received is fully vested and has an exercise price of
$11.42 per share.
Pursuant to a written lease dated June 30, 1998, Frank Willson is a
member of Saltwater, L.L.C., the landlord of an office building in Virginia
Beach, Virginia in which we are a tenant. We pay $6,527.27 per month under the
lease that runs until December 31, 2003. Mr. Willson owns approximately 9.31% of
our outstanding stock.
Management has verbally agreed to enter into a written agreement with
certain stockholders of Avatech giving the right to those stockholders to
participate (through the selling of owned shares) in underwritten public
offerings. The stockholders to be given these rights are our founding
stockholders who were considered to be affiliates of Avatech prior to the merger
with PlanetCAD on November 19, 2002. Specifically, the Avatech stockholders to
be given the participation rights are Frank Willson, Jean and Brice Schaeffer,
Greg Blackwell and Keith Carter. Each of Mr. Willson, Ms. Schaeffer, Mr.
Blackwell and Mr. Carter were, until November 2002, members of our Board of
Directors. Mr. Willson, the Schaeffers, Mr. Blackwell and Mr. Carter own
approximately
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9.31%, 8.27%, 7.17% and 4.21% of the outstanding shares of Avatech common stock,
respectively. The participation rights will be available on a pro-rata basis
with any other stockholder who may have similar rights, and they will be subject
at all times to the combined company's sale of securities in the applicable
underwritten offering. In addition to their right to have shares included in
underwritten public offerings, resales of shares owned by these individuals are
covered by this Prospectus.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of our common stock by (i) each of our current directors, (ii) each of
our executive officers named in the summary compensation table found on page 34,
(iii) all of such officers and directors as a group, and (iv) all those known us
to be beneficial owners of more than five percent of our common stock as of
December 31, 2002. For the purposes of this table, ownership figures are based
on reported ownership of Avatech securities as of December 31, 2002.
Beneficial Ownership/1/
------------------------------------
Name and Address of Beneficial Owner Number of Shares Percent of Shares
- ------------------------------------ ---------------- -----------------
James A. Fanella/2/ 750 *
23 Wescott Drive
South Barrington, Il 60010
Eugene J. Fischer/3/ 75,598 2.55
245 Laning Drive
Woodside, CA 94062
John W. Sasser/4/ 372 *
1820 Circle Road
Baltimore, MD 21204
W. James Hindman/5/ 85,372 2.88
2322 Nicodemus Road
Westminster, MD 21157
V. Joel Nicholson/6/ 157,312 5.30
745 N. MacEwen Drive
Osprey, FLA 34229
Henry D. Felton/7/ 249,577 8.41
13001 Dover Road
Reisterstown, MD 21136
-- --
Gary Rever/8/ 14,880 *
2204 Eastlake Road
Timonium, MD 21093
Debra Keith/9/ 7,241 *
1811 Kendall Court
Keller, TX 76248
Donald Walsh/10/ 1,860 *
3 Boxwood Lane
Lutherville, MD 21093
- ----------
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* Less than one percent.
1. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Avatech common stock
subject to options and warrants currently exercisable within 60 days of
December 31, 2002 are deemed outstanding for purposes of computing the
percentage of the person or entity holding such securities but are not
deemed outstanding for purposes of computing the percentage of any other
person or entity. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
2. Includes 750 shares subject to stock options that are exercisable within 60
days of December 31, 2002.
3. Includes 1,377 shares subject to stock options that are exercisable within
60 days of December 31, 2002, 39,343 shares held of record by Capstone
Ventures SBIC, L.P. (including 30,497 shares underlying convertible
preferred stock), and 19,630 shares of common stock issuable upon exercise
of outstanding warrants held by Capstone. Mr. Fischer is the president of
the general partner of Capstone. Mr. Fischer shares voting and dispositive
power with respect to the shares held by Capstone with Barbera L. Santry.
4. Includes 372 shares of common stock subject to a warrant that is
exercisable within 60 days of December 31, 2002.
5. Mr. Hindman serves as Chairman of the Board of Avatech. Includes 2,604
shares subject to stock options that are exercisable within 60 days of
December 31, 2002, 1,488 warrants to purchase common stock held by Mr.
Hindman's spouse, 1,860 warrants to purchase common stock held by Mr.
Hindman, and 10,952 shares held by Hindman and Associates. Mr. Hindman's
adult children beneficially own 154,287 shares of Avatech. Mr. Hindman
disclaims beneficial ownership of the shares owned by his adult children.
6. Mr. Nicholson serves as an Executive Vice President of Avatech. Includes
2,188 shares owned by Mr. Nicholson's spouse.
7. Mr. Felton serves as the Vice Chairman of the Board of Avatech. Includes
49,019 shares subject to stock options that are exercisable within 60 days
of December 31, 2002, 2,604 warrants to purchase common stock held by Mr.
Felton's spouse, and 1,860 warrants to purchase common stock owned by Mr.
Felton.
8. Mr. Rever serves as Chief Financial Officer of Avatech. Includes 14,880
shares subject to stock options that are exercisable within 60 days of
December 31, 2002.
9. Mrs. Keith serves as Senior Vice President, Sales and Marketing of Avatech.
Includes 7,241 shares subject to stock options are exercisable within 60
days of December 31, 2002.
10. Mr. Walsh serves as Chief Executive Officer of Avatech. Includes 1,860
shares subject to stock options that are exercisable within 60 days of
December 31, 2002.
PLAN OF DISTRIBUTION
This Prospectus covers:
1. Resales of shares by certain holders of our common stock, who
acquired their shares upon conversion of PlanetCAD's Series B
Convertible Preferred Stock at the time of our merger with
PlanetCAD in November 2002. These holders were granted
registration rights pursuant to which we were contractually
obligated to register their shares for resale within 120 days
after the closing of the merger.
2. Resales of shares of our common stock acquired upon conversion
of our Series C Convertible Preferred Stock, which is
convertible at any time after 120 days from the date of
issuance thereof.
3. The initial issuance of shares to shareholders of companies we
acquire by merger or otherwise who are issued shares in
exchange for all of the issued and outstanding shares of such
companies,
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or in exchange for all or substantially all of the assets of
such companies. Material terms of any such acquisition
transactions will be disclosed in Supplements to this
Prospectus prior to the issuance of such shares.
4. The initial issuance of shares to key management employees,
consultants, officers, and directors under our Restricted
Stock Award Plan in exchange for past or future services to
us. The Restricted Stock Award Plan is provided as Annex A to
this Prospectus.
Resales of shares effectuated pursuant to this Prospectus may occur from time to
time at market prices prevailing at the time of sale, at fixed prices, or in
privately negotiated transactions. We will not receive any of the proceeds from
the sale of such shares.
DESCRIPTION OF SECURITIES
The following is a summary of the material information relating to our
common stock based on our certificate of incorporation and bylaws and the
applicable provisions of the Delaware General Corporation Law. For information
on how to obtain copies of our certificate of incorporation and bylaws, see
"Where You Can Find More Information."
As of the date of Prospectus, we have the authority to issue an
aggregate of 25,000,000 shares of capital stock, consisting of 22,500,000 shares
of common stock, par value $0.01 per share, and 2,500,000 shares of preferred
stock issuable from time to time by the board of directors in one or more
classes or series. As of January 31, 2003, there were 2,965,958 shares of our
common stock outstanding, no shares of Series A Junior Participating Preferred
Stock outstanding, no shares of Series B Convertible Preferred Stock outstanding
and 34,585 shares of Series C Convertible Preferred Stock outstanding.
COMMON STOCK
Dividends. The holders of common stock are entitled to dividends when
and as declared by the board of directors from funds legally available to pay
such dividends.
Voting Rights. Each holder of Avatech's common and preferred stock is
entitled to attend all special and annual meetings of the stockholders of
Avatech, and to vote upon any matter, including, without limitation, the
election of directors, properly brought for consideration before the
stockholders. The holders of common stock are entitled to one vote for each
share held of record.
No Preemptive or Conversion Rights. Holders of Avatech common stock
have no preemptive rights and no rights to convert their common stock into any
other securities.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of Avatech, the holders of Avatech common stock and the holders of
any class or series of stock entitled to participate with such holders, will be
entitled to participate in the distribution of any assets of Avatech remaining
after Avatech has paid all of its debts and liabilities and after Avatech has
paid, or set aside for payment, to the holders an amount equal to the purchase
price for, and any accrued and unpaid dividends on, to any future class or
series of stock with a liquidation preference over the common stock the
preferential amount to which they are entitled.
AVATECH PREFERRED STOCK
Avatech's board of directors has designated three classes of preferred
stock: the Series A Junior Participating Preferred Stock, the Series B
Convertible Preferred Stock, and the Series C Convertible Preferred Stock. In
addition, the board of directors has the authority to designate additional
classes or series of preferred stock in the future with rights that may
adversely affect the rights of the holders of Avatech common stock.
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Liability. Delaware law authorizes corporations to
limit or eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of the fiduciary duty of care.
Although Delaware law does not change the duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. Avatech's certificate of incorporation limits the liability of
directors to Avatech or its stockholders to the fullest extent permitted under
Delaware law. Specifically, directors of Avatech are not personally liable for
monetary damages to Avatech or its stockholders for breaches of the their
fiduciary duties, except for liability for acts or omissions not in good faith
or involving intentional misconduct, for knowing violations of the law, for any
transaction from which the director or executive officer derived an improper
personal benefit, or for authorizing the payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law.
Indemnification. Avatech has entered into indemnification agreements
with each of its directors and executive officers that require Avatech to
indemnify each such person to the fullest extent authorized or permitted by
Avatech's certificate of incorporation and Delaware law against expenses,
judgments, fines, settlements and other amounts actually and responsibly
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which they may be made a party by
reason of the fact that they are or were acting as a director, officer,
employee, or other agent of Avatech or any of its affiliated enterprises.
Delaware law permits this indemnification, provided the person acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interest of Avatech and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder. In addition, Avatech maintains director
and officer liability insurance which, subject to certain exceptions and
limitations, insures directors and officers for any alleged breach of duty,
neglect, error, misstatement, misleading statement, omission, or act in their
respective capacities as directors and officers of Avatech.
CERTAIN PROVISIONS RELATING TO A CHANGE OF CONTROL
Provisions Related To The Election Of Directors And Stockholder
Action. Avatech's certificate of incorporation requires the affirmative vote of
two-thirds of the stockholders to remove a director from the board of directors
without cause. The certificate of incorporation also provides that all board
vacancies are to be filled by the remaining directors, unless the remaining
directors approve a stockholder vote to fill a vacancy. Avatech's bylaws
prohibit less than two-thirds of Avatech's stockholders from calling a special
meeting, whether for the purpose of replacing directors or for any other
purpose. As a result, once elected, Avatech directors may not be removed from
office without cause until the next annual meeting of the stockholders.
Therefore, a third party interested in taking control of Avatech quickly will
not be able to do so unless the third party acquires two-thirds or more of
Avatech's voting securities at the time of the acquisition. In addition,
Avatech's certificate of incorporation and bylaws prohibit stockholders from
taking action by written consent in lieu of a meeting.
Stockholder Rights Plan. In March 2002, Avatech's board of directors
adopted a stockholders rights plan. The plan is designed to deter a takeover of
Avatech on terms other than those approved by the Avatech's board of directors.
The plan causes substantial dilution to a person or group that attempts to
acquire Avatech on terms that are not approved by the Avatech board of
directors. Under the plan, each Avatech stockholder as of March 21, 2002
received a right that entitles that stockholder to purchase one one-thousandth
of a share of Avatech's Series A Junior Participating Preferred Stock for each
share of common stock held. Generally, the rights become exercisable only if a
person or group acquires or obtains the rights to acquire 15% or more of
Avatech's outstanding common stock, or if a tender or exchange offer is
commenced, the completion of which would result in a person owning more than 15%
of Avatech's outstanding common stock. The rights, however, are not exercisable
if a person who acquires more than 15% of Avatech's outstanding common stock
offers to purchase all of Avatech's outstanding shares of common stock and
Avatech's board of directors determines by a two-thirds vote that such offer is
fair to and otherwise in the best interests of Avatech and its stockholders.
If the rights become exercisable, the rights of the person who
acquires more than 15% of Avatech's common stock become null and void. All other
stockholders will be entitled to purchase stock of Avatech, or the stock of any
company that has acquired Avatech, having a value twice that of the exercise
price of the rights. For
- 38 -
example, at a purchase price of $5.00 per right, each right would entitle its
holder to purchase $10.00 worth of stock of Avatech or the company that has
acquired Avatech for $5.00. The rights will expire March 8, 2012, and are
redeemable for $0.0001 per right at the approval of Avatech's board of
directors. It is highly probable that our Board of Directors will redeem the
rights and terminate the Plan, although as of the date of this Prospectus, it
has not done so.
Certain Statutory Provisions. Avatech is subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, this provision
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
. prior to such date, the corporation's board of directors
approved either the business combination or the transaction
that resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction that resulted in such
person becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain
employee stock plans; and
. on or after the date the stockholder became an interested
stockholder, the business combination is approved by the
corporation's board of directors and authorized by the
affirmative vote, and not by written consent, of at least
two-thirds of the outstanding voting stock of the corporation
excluding that owned by the interested stockholder.
A "business combination" includes a merger, asset sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person, other than the corporation and any direct
or indirect wholly-owned subsidiary of the corporation, who together with the
affiliates and associates, owns or, as an affiliate or associate, within three
years prior, did own 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above
any business combination by a corporation with an interested stockholder who
becomes an interested stockholder in a transaction approved by the corporation's
board of directors.
SUMMARY OF AVATECH SOLUTIONS, INC. RESTRICTED STOCK AWARD PLAN
The Avatech Solutions, Inc. Restricted Stock Award Plan is designed to
allow us to attract and retain the services of key management employees,
consultants, officers and directors essential to our long-term growth and
financial success. The restricted stock awards will play a significant role in
our efforts to remain competitive in the market for talented individuals, and we
believe that these awards will allow us to attract and retain highly qualified
individuals in positions vital to our success.
The following is a summary of the material terms of the Restricted
Stock Award Plan, which is attached to this prospectus as Annex A and is
incorporated herein by reference. We urge you to read the Restricted Stock Award
Plan carefully as it is a legal document that governs the plan.
Administration. Our board of directors as a whole or a committee of
the board of directors made up of two non-employee directors have the authority
to make awards restricted stock and set the terms on which grants of stock
become vested.
Share Reserve. Initially, 200,000 shares of common stock are reserved
for issuance under the terms of the Restricted Stock Award Plan.
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The shares of common stock issuable under the Restricted Stock Award
Plan may be drawn from shares of our authorized but unissued common stock or
from shares of our common stock which we acquire, including shares purchased on
the open market.
Shares of unvested stock that are forfeited or otherwise reacquired by
us may be reissued under the Plan.
Eligibility. Employees, and consultants of Avatech or one of its
subsidiaries are eligible to receive stock awards under the Plan if they are
already shareholders or hold options to purchase shares of our common stock.
Officers and directors are also eligible to receive stock awards without regard
to whether they are already own our stock.
Restricted Stock Awards. The board of directors (or committee) will
have the complete discretion to determine which eligible individuals will
receive stock awards, the time or times when those awards are made, the number
of shares awarded, and the conditions on vesting of the shares. However, awards
will be made only in recognition of past or future services to Avatech.
The shares will generally vest in more than one installment after
either the recipient's continued service to us for a specific term of years or
the recipient's achievement of specific, predetermined performance goals.
Generally, unvested shares may not be transferred by the recipient before they
become vested and will be held in escrow by us. Unvested shares may be exchanged
or surrendered in a tender offer, merger, split, or other reorganization and
will not be subject to restrictions under the Plan in the hands of such a
recipient; however, any consideration received in such an exchange will continue
to be subject to the original vesting restrictions.
Valuation. As long as our stock is listed on the OTC Bulletin Board,
the fair market value of our common stock under the Restricted Stock Award Plan
will be deemed to be the last closing price of our common stock on the OTC
Bulletin Board as of the close of business on the last business day prior to the
date on which the shares are to be valued.
TAX TREATMENT OF SHARES AWARDED UNDER THE AVATECH SOLUTIONS, INC.
RESTRICTED STOCK AWARD PLAN
Under section 83(a) of the Internal Revenue Code of 1986, as amended,
shares of stock granted to a person in connection with their performance of
services to the issuer but subject to a "substantial risk of forfeiture" are not
subject to income taxation until risk of forfeiture lapses. Under the
regulations promulgated by the Department of the Treasury under section 83(a),
stock is subject to a "substantial risk of forfeiture" if a recipient's
continued rights in the shares are conditioned on the future performance of
substantial services to the issuer or the completion of any other condition
related to the purpose for the initial grant of shares, and if there is a
substantial possibility that the conditions will not be satisfied. The Shares
awarded under the Restricted Stock Award Plan will generally be subject to a
"substantial risk of forfeiture" while they are unvested.
Ordinarily, a recipient of unvested shares under the Restricted Stock
Award Plan will not pay income tax on the value of the shares until the shares
become vested. The recipient will then have a basis in the shares equal to the
value of the shares on the day they vest and are taxed. When the recipient
subsequently sells the shares, any gain or loss will be treated as a capital
gain or loss. If a recipient sells unvested shares despite the transfer
restrictions, he or she must pay taxes on the larger of the sale price or the
fair market value of the shares on the day they are sold.
A person who receives unvested shares of stock in connection with
services performed for the issuer may make an election under section 83(b) of
the Internal Revenue Code of 1986, as amended, to be taxed on the value of the
shares in the year in which the shares are received rather than when the shares
vest. The election must be made within thirty days of the award of stock and is
generally irrevocable. If the recipient of shares makes this "83(b) election,"
he or she will pay ordinary income tax on the value of the shares when they are
received and will have a basis in the stock equal to the value of the shares
when they are issued. If the shares vest and the recipient sells the shares, any
gain or loss on the transaction will be a capital gain or loss. However, if the
recipient forfeits the shares, he or she may not claim a loss, even though he or
she paid taxes on the shares when they were received.
- 40 -
When the value of the shares is taxed, the shares will be treated as
salary if the recipient is an employee of Avatech and otherwise will be treated
as shares received in exchange for services. If necessary, we may withhold taxes
from the recipient at the time the shares are taxed.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
Certain legal matters will be passed upon for Avatech by Neuberger,
Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, Maryland.
EXPERTS
The consolidated financial statements and schedule of Avatech
Solutions, Inc. and subsidiaries at June 30, 2002 and for the year then ended,
included in this registration statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Avatech
Solutions, Inc. and subsidiaries as of June 30, 2001 and 2000, and for each of
the two years in the period ended June 30, 2001, included in this registration
statement have been audited by Walpert and Wolpoff, LLP, independent auditors,
as stated in their report appearing herein, and upon the authority of such firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference rooms at the following
locations:
Public Reference Section Northeast Regional Office Midwest Regional Office
450 Fifth Street, N.W. 233 Broadway Northwestern Atrium Center
Washington, D.C. 20549 New York, NY 10279 500 West Madison Street, Suite 1400
Chicago, IL 60661
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the website maintained by the SEC
at www.sec.gov.
We filed a registration statement on Form S-1 to register with the SEC
the common stock to be issued or sold hereunder. This Prospectus is a part of
our registration statement.
As allowed by SEC rules, this Prospectus does not contain all the
information you can find in our registration statement or the exhibits to the
our registration statement. You may obtain copies of the registration statement
in the manner described above.
- 41 -
The SEC allows us to "incorporate by reference" information into this
Prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this Prospectus, except for
any information superseded by information contained directly in this Prospectus.
This Prospectus incorporates by reference the documents set forth below that we
have previously filed with the SEC. These documents have been supplied to you
along with this Prospectus.
These documents contain important information about us and our
financial condition:
PLANETCAD SEC FILINGS (FILE NO. 0-288-42) DATE FILED FILE NO.
Annual Report on Form 10-KSB for the year
ended December 31, 2001 April 11, 2002 001-31265
Amendment No. 1 to Annual Report on
Form 10-KSB for the year ended December 31, 2001 April 30, 2002 001-31265
Amendment No. 2 to Annual Report on
Form 10-KSB for the year ended December 31, 2001 July 17, 2002 001-31265
Amendment No. 3 to Annual Report on
Form 10-KSB for the year ended December 31, 2001 August 21, 2002 001-31265
Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2002 May 15, 2002 001-31265
Amendment No. 1 to Quarterly Report on Form
10-QSB for the quarter ended March 31, 2002 August 21, 2002 001-31265
Quarterly Report on Form 10-QSB for the quarter ended June 30, August 14, 2002 001-31265
2002
Quarterly Report on Form 10-QSB for the quarter ended November 14, 2002 001-31265
September 30, 2002
Quarterly Report on Form 10-QSB for the quarter ended December February 14, 2003 001-31265
31, 2002
Current Report on Form 8-K January 25, 2002 001-28842
Current Report on Form 8-K March 11, 2002 001-31265
Current Report on Form 8-K May 2, 2002 001-31265
Current Report on Form 8-K May 28, 2002 001-31265
Current Report on Form 8-K August 14, 2002 001-31265
Current Report on Form 8-K August 21, 2002 001-31265
Current Report on Form 8-K November 20, 2002 001-31265
Current Report on Form 8-K December 4, 2002 001-31265
Current Report on Form 8-K January 31, 2003 001-31265
Current Report on Form 8-K February 19, 2003 001-31265
Current Report on Form 8-K March 4, 2003 001-31265
DOCUMENTS INCORPORATED BY REFERENCE ARE AVAILABLE FROM US WITHOUT CHARGE,
EXCLUDING ALL EXHIBITS UNLESS WE HAVE SPECIFICALLY INCORPORATED BY REFERENCE AN
EXHIBIT IN THIS PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS MAY OBTAIN DOCUMENTS
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS BY REQUESTING THEM
IN WRITING OR BY TELEPHONE FROM US AT THE FOLLOWING ADDRESS:
AVATECH SOLUTIONS, INC.
11403 A CRONHILL DRIVE
OWINGS MILLS, MARYLAND 21117
You may also obtain information from our website: www.avat.com.
- 42 -
WHAT INFORMATION YOU SHOULD RELY ON
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS
PROSPECTUS.THEREFORE, IF ANYONE GIVES YOU DIFFERENT OR ADDITIONAL INFORMATION,
YOU SHOULD NOT RELY ON IT.
THIS DOCUMENT IS DATED MARCH 26, 2003. THE INFORMATION CONTAINED IN THIS
PROSPECTUS SPEAKS ONLY AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO EXCHANGE OR SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR
PURCHASE, SHARES OF AVETECH COMMON STOCK OR TO ASK FOR PROXIES, TO OR FROM ANY
PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THESE ACTIVITIES.
- 43 -
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors............................................F - 2
Audited Financial Statements
Consolidated Balance Sheets.............................................F - 4
Consolidated Statements of Operations...................................F - 5
Consolidated Statements of Stockholders' Deficiency.....................F - 6
Consolidated Statements of Cash Flows...................................F - 7
Notes to Consolidated Financial Statements.................................F - 8
F - 1
REPORTS OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Avatech Solutions, Inc.
We have audited the accompanying consolidated balance sheet of Avatech
Solutions, Inc. and subsidiaries as of June 30, 2002, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the year 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
Since the date of completion of our audit of the accompanying
financial statements and initial issuance of our report thereon dated September
3, 2002, the Company, as discussed in Note 14, has experienced a decline in
working capital resulting principally from costs incurred to complete the
acquisition of PlanetCAD, Inc. Note 14 describes management's plans to address
this liquidity issue.
In our opinion, the 2002 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Avatech Solutions, Inc. and subsidiaries at June 30, 2002 and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Baltimore, Maryland
September 3, 2002 (except Note 3 and 14, as to which the date is
March 10, 2003)
F - 2
To the Board of Directors and Stockholders
Avatech Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Avatech
Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated October 3, 2001,
the Company, as discussed in Note 14, has experienced a decline in working
capital resulting principally from costs incurred to complete the acquisition of
PlanetCAD, Inc. Note 14 describes management's plans to address this liquidity
issue.
WALPERT & WOLPOFF, LLP
Baltimore, Maryland
October 3, 2001 (except for Note 3 and 14, as to which the date is
March 10, 2003)
F - 3
AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
----------------------------
2001 2002 2002
--------------------------------------------
(Restated - Note 3) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 309,621 $ 222,562 $ 541,855
Accounts receivable, less allowance of $212,000 in 2001, $111,897 in
2002 and $258,569 at December 31, 2002 5,123,773 4,108,372 3,855,186
Inventory 462,660 356,013 305,394
Deferred income taxes - 373,000 -
Prepaid expenses 232,202 113,469 559,331
Other current assets 150,209 - 60,068
--------------------------------------------
Total current assets 6,278,465 5,173,416 5,321,834
Property and equipment:
Computer software and equipment 2,381,422 2,664,168 2,935,045
Office furniture and equipment 799,526 778,037 768,034
Leasehold improvements 191,908 198,002 308,143
--------------------------------------------
3,372,856 3,640,207 4,011,222
Less accumulated depreciation and amortization 2,461,630 2,889,000 3,128,037
--------------------------------------------
911,226 751,207 883,185
Goodwill 1,108,920 752,920 878,378
Other intangible assets, net of accumulated amortization of $22,889 - - 663,111
Other assets 78,404 430,870 116,641
--------------------------------------------
Total assets $ 8,377,015 $ 7,108,413 $ 7,863,149
============================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 4,021,062 $ 3,655,902 $ 5,047,345
Accrued compensation and related benefits 293,780 223,919 278,225
Borrowings under line-of-credit 1,916,912 1,422,901 1,434,202
Note payable to related party - - 500,000
Current portion of long-term debt 2,968,030 500,000 248,388
Deferred revenue 794,916 650,511 940,498
Other current liabilities 211,215 335,930 170,006
--------------------------------------------
Total current liabilities 10,205,915 6,789,163 8,618,664
Long-term debt (including $775,000 payable to related parties) 1,595,938 4,057,112 -
Commitments and contingencies - - -
Minority interest - - 1,525,000
Stockholders' deficiency:
Common stock, $0.01 par value; 22,500,000 shares authorized; issued and
outstanding shares of 2,227,392, 2,220,670, and 2,965,958, respectively 22,274 22,207 29,660
Additional paid-in capital 1,764,438 1,698,976 2,976,523
Accumulated deficit (5,211,550) (5,459,045) (5,286,698)
--------------------------------------------
Total stockholders' deficiency (3,424,838) (3,737,862) (2,280,515)
--------------------------------------------
Total liabilities and stockholders' deficiency $ 8,377,015 $ 7,108,413 $ 7,863,149
============================================
See Accompanying Notes.
F - 4
AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, Six Months Ended December 31
----------------------------------------------------------------------------
2000 2001 2002 2001 2002
----------------------------------------------------------------------------
(Unaudited)
Revenue:
Product sales $ 22,436,739 $ 20,490,029 $ 18,486,676 $ 9,895,458 $ 6,904,130
Service revenue 7,519,169 6,049,275 6,482,160 2,908,982 3,313,859
Commission revenue 3,199,443 4,332,174 4,843,751 2,319,198 2,082,770
----------------------------------------------------------------------------
33,155,351 30,871,478 29,812,587 15,123,638 12,300,759
Cost of revenue:
Cost of product sales 16,228,849 14,249,470 12,464,965 6,582,974 4,581,813
Cost of service revenue 4,664,518 3,813,635 3,773,041 1,826,517 2,075,573
----------------------------------------------------------------------------
20,893,367 18,063,105 16,238,006 8,409,491 6,657,386
Gross margin 12,261,984 12,808,373 13,574,581 6,714,147 5,643,373
Other expenses:
Selling, general and administrative 12,919,902 11,519,199 12,806,324 6,377,576 6,282,221
Depreciation and amortization 692,180 694,503 589,306 331,872 313,642
Impairment loss - - 285,374 - -
Acquired in-process research and
development - - - - 282,000
----------------------------------------------------------------------------
13,612,082 12,213,702 13,681,004 6,709,448 6,877,863
----------------------------------------------------------------------------
Income (loss) from operations (1,350,098) 594,671 (106,423) 4,699 (1,234,490)
Other income (expense):
Gain on the extinguishment of debt - - - - 1,960,646
Interest and other income (expense) (61,819) 61,488 61,510 71,181 24,737
Minority interest - - - - (17,891)
Interest expense (641,320) (553,823) (487,582) (252,612) (157,655)
----------------------------------------------------------------------------
(703,139) (492,335) (426,072) (181,431) 1,809,837
----------------------------------------------------------------------------
Income (loss) before income taxes (2,053,237) 102,336 (532,495) (176,732) 575,347
Income tax expense (benefit) - 13,000 (285,000) 22,843 403,000
----------------------------------------------------------------------------
Net income (loss) $ (2,053,237) $ 89,336 $ (247,495) $ (199,575) $ 172,347
============================================================================
Earning (loss) per common share - basic
and diluted $ (0.91) $ 0.04 $ (0.11) $ (0.09) $ 0.07
============================================================================
Shares used in computation 2,251,402 2,220,856 2,224,993 2,220,670 2,390,790
============================================================================
See Accompanying Notes.
F - 5
AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 30, 2002, 2001, 2000 AND
SIX MONTHS ENDED DECEMBER 31, 2002
Common Stock
Number of Additional Accumulated
Shares Par Value Paid-In Capital Deficit Total
---------------------------------------------------------------------------------------
(Restated -Note 3)
Balance at July 1, 1999 2,217,005 $ 22,169 $ 1,615,840 $ (3,247,649) $ (1,609,640)
Issuance of common stock for cash 37,966 380 410,245 - 410,625
Issuance of common stock in
connection with the 1998 Employee
Stock Purchase Plan 6,967 70 67,839 - 67,909
Purchase of common stock
from former employees (25,143) (251) (242,447) - (242,698)
Net loss for fiscal year 2000 - - - (2,053,237) (2,053,237)
---------------------------------------------------------------------------------------
Balance at June 30, 2000 2,236,795 22,368 1,851,477 (5,300,886) (3,427,041)
Issuance of common stock for cash 2,288 23 26,225 - 26,248
Purchase of common stock from former
employees (11,691) (117) (113,264) - (113,381)
Net income for fiscal year 2001 - - - 89,336 89,336
---------------------------------------------------------------------------------------
Balance at June 30, 2001 2,227,392 22,274 1,764,438 (5,211,550) (3,424,838)
Purchase of common stock from
current and former employees (6,722) (67) (65,462) - (65,529)
Net loss for fiscal year 2002 - - - (247,495) (247,495)
---------------------------------------------------------------------------------------
Balance at June 30, 2002 2,220,670 22,207 1,698,976 (5,459,045) (3,737,862)
Issuance of shares of common
stock to purchase PlanetCAD, Inc.
(Unaudited) 745,288 7,453 1,277,547 - 1,285,000
Net income for the six months ended
December 31, 2002 (Unaudited) - - - 172,347 172,347
---------------------------------------------------------------------------------------
Balance at December 31, 2002 (Unaudited) 2,965,958 $ 29,660 $ 2,976,523 $ (5,286,698) $ (2,280,515)
=======================================================================================
See Accompanying Notes.
F - 6
AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
Year Ended June 30, December 31
----------------------------------------------------------------------------
2000 2001 2002 2001 2002
----------------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,053,237) $ 89,336 $ (247,495) $ (199,575) $ 172,347
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for bad debts 55,367 73,893 75,542 8,375 44,565
Gain on extinguishment of debt - - - - (1,960,646)
Depreciation and amortization 692,180 694,503 612,918 331,871 313,642
Deferred income taxes 23,802 - (373,000) - 373,000
Impairment loss - - 285,374 - -
Gain on available-for-sale securities (2,205) - - - -
Write-off of in-process research and development - - - - 282,000
Loss (gain) on disposal of property and
equipment 17,420 1,420 7,575 - (3,532)
Amortization of debt discount charged to
interest expense 3,838 2,694 3,844 - -
Other - - - - 1,920
Changes in operating assets and liabilities:
Accounts receivable (1,869) (1,027,531) 893,017 1,085,715 363,623
Inventory 385,182 (7,065) 106,647 23,390 50,619
Prepaid expenses and other current assets 437,728 96,987 190,804 216,433 (394,748)
Accounts payable and accrued expenses 272,247 (295,547) (240,179) (463,514) 742,899
Accrued compensation and related benefits 23,451 (23,439) (69,862) (21,225) (16,988)
Deferred revenue 213,915 14,144 (144,405) (102,626) 60,661
Other current liabilities 141,401 29,410 (4,058) (14,383) (165,924)
----------------------------------------------------------------------------
Net cash provided by (used in) operating activities 209,220 (351,195) 1,096,722 864,461 (136,562)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash (paid) received in merger, net of acquisition
costs - - (302,228) - 343,445
Purchase of property and equipment (535,161) (394,060) (258,944) (98,647) (75,811)
Proceeds from sale of property and equipment 4,436 6,343 10,584 - 3,532
Proceeds from sale of available-for-sale securities 16,807 - - - -
----------------------------------------------------------------------------
Net cash provided by (used in) investing activities (513,918) (387,717) (550,588) (98,647) 271,166
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line-of-credit 31,870,180 30,977,721 31,166,171 15,805,605 13,618,320
Repayments of borrowings under line-of-credit (32,571,042) (30,244,758) (31,660,182) (16,449,288) (13,607,019)
Proceeds from issuance of long-term debt 137,269 - - - 1,175,000
Repayments of long-term debt (188,894) (6,810) - (8,184) (1,000,000)
Proceeds from issuance of common stock 478,534 26,248 - - -
Repurchase of common stock (242,698) (113,381) (65,529) - -
Change in other assets related to financing costs 45,891 (13,794) (73,653) - (1,612)
----------------------------------------------------------------------------
Net cash provided by (used in) financing activities (470,760) 625,226 (633,193) (651,867) 184,689
----------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (775,458) (113,686) (87,059) 113,947 319,293
Cash and cash equivalents--beginning of period 1,198,765 423,307 309,621 309,621 222,562
----------------------------------------------------------------------------
Cash and cash equivalents--end of period $ 423,307 $ 309,621 $ 222,562 $ 423,568 $ 541,855
============================================================================
See Accompanying Notes.
F - 7
AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of Presentation. Avatech Solutions, Inc.
provides design automation software, hardware, training, technical support and
professional services to corporations, government agencies and educational
institutions throughout the United States.
The consolidated financial statements include the accounts of Avatech
Solutions, Inc. and its subsidiaries (collectively, the "Company"). One of the
Company's subsidiaries has issued and outstanding preferred stock, which is
accounted for as minority interest. All intercompany accounts and transactions
have been eliminated in consolidation.
Unaudited Interim Financial Information. All interim financial
information as of December 31, 2002 and for the six month periods ended December
2001 and 2002 is unaudited and has been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Article 10 of Regulation S-X. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments considered necessary for a fair presentation of such periods. The
operating results for any interim period are not necessarily indicative of
results for any future period.
Use of Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Inventory. Inventory, consisting of computer software and hardware, is
stated at the lower of first-in, first-out cost, or market.
Property and Equipment. Property and equipment is stated at cost.
Depreciation for computer software and equipment and office furniture and
equipment is provided for by the straight-line method over estimated useful
lives ranging from three to seven years. Leasehold improvements are depreciated
over the lesser of the lease term or the useful life of the asset using the
straight-line method.
Impairment of Long-Lived Assets Excluding Goodwill. Long-lived assets,
excluding goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or group of assets
may not be fully recoverable. These events or changes in circumstances may
include a significant deterioration of operating results, changes in business
plans, or changes in anticipated future cash flows. If an impairment indicator
is present, the Company evaluates recoverability by a comparison of the carrying
amount of the assets to future undiscounted net cash flows expected to be
generated by the assets. Assets are grouped at the lowest level for which there
is identifiable cash flows that are largely independent of the cash flows
generated by other asset groups. If the assets are impaired, the impairment
recognized is measured by the amount by which the carrying amount exceeds the
fair value of the assets. Fair value is generally determined by estimates of
discounted cash flows. The discount rate used in any estimate of discounted cash
flows would be the rate required for a similar investment of like risk.
Goodwill. Goodwill is the excess of the purchase price paid over the
fair value of the identifiable net assets acquired in purchase business
combinations. Prior to July 1, 2002, goodwill was amortized on a straight-line
basis over 15 years. Commencing July 1, 2002, goodwill is not amortized but is
tested annually for impairment at the reporting unit level. Impairment is the
condition that exists when the carrying amount of goodwill exceeds its implied
fair value. The implied fair value of goodwill is the amount determined by
deducting the estimated fair value of all tangible and identifiable intangible
net assets of the reporting unit from the estimated fair value of the
F - 8
reporting unit. If the recorded value of goodwill exceeds its implied value, an
impairment charge is recorded for the excess. (See also Note 1, Recent
Accounting Pronouncements).
Stock Options Granted to Employees. The Company uses the intrinsic
value method to account for its employee and director stock option plans. Under
the intrinsic value method, compensation expense is calculated as the difference
between the fair value of the underlying common stock and the exercise price of
the option at the date of grant for fixed stock option awards. Any resulting
compensation expense is recognized pro rata over the vesting period. The Company
discloses in Note 8 the pro forma effects on net income if the Company had
elected the fair value method of accounting for stock options.
Revenue Recognition and Accounts Receivable. The Company generates
revenue from three sources, the resale of prepackaged software products,
professional services and commissions. Software products are frequently sold in
an arrangement that includes implementation services or maintenance services.
Maintenance services are limited to help desk support and training. The Company
allocates the total arrangement fee among each element based on vendor-specific
objective evidence of the relative fair value of each of the elements. The
Company limits its assessment of fair value of each element to the price charged
when the same element is sold separately.
Revenues for software product sales are recognized as revenue when
four criteria are met. These four criteria are (i) a signed purchase order has
been obtained (ii) delivery of the software has occurred (iii) the fee is fixed
or determinable and (iv) the fee is probable of collection. Software product
sales billed and not recognized as revenue are included in deferred revenue. The
Company generally does not require collateral. The Company provides a 30-day
return policy to its customers. The Company has historically not experienced
significant returns, and accordingly, allowances for returned products are not
recorded.
Revenues from maintenance services are recognized ratably over the
contractual service period. Revenues from implementation and training services
are recognized as the services are provided. Advance payments for these services
are deferred and recognized in the periods when the services are performed.
The Company also receives commissions from vendors for transactions in
which the Company does not take title to the product or have responsibility for
the delivery of the services, has no risk of loss for collection, and has acted
as an agent or broker. These commissions are recorded as revenue when earned.
Cost of Product Sales. Cost of product sales includes the costs of
purchasing software and hardware from suppliers and the associated shipping and
handling costs.
Cost of Service Revenue. Cost of service revenue consists primarily of
direct employee compensation and related benefits, the cost of subcontracted
services and direct expenses billable to customers. Cost of service revenue does
not include an allocation of overhead costs.
Warranty Costs. The Company does not provide for warranty costs for
its products as such costs are incurred by the manufacturer of the products.
Advertising Costs. Costs incurred for producing and communicating
advertisements are expensed as incurred and included in selling, general and
administrative expenses in the accompanying statements of operations.
Advertising expenses approximated $399,000, $412,000 and $549,000 for years
ended June 30, 2000, 2001 and 2002, respectively.
Business Segment Reporting. The Company's operating segments are
established based on geographical areas managed by location managers and for
which discrete financial information is prepared and reviewed by the Company's
chief operating decision maker. These segments are aggregated for segment
reporting purposes into one reporting segment because the operating segments
have similar economic characteristics and generate revenues from sales of
similar products and services to similar types of customers.
Income Taxes. The Company uses the liability method to account for
income taxes. Income tax expense includes income taxes currently payable and
deferred taxes arising from temporary differences between financial
F - 9
reporting and income tax bases of assets and liabilities. Deferred income taxes
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Concentration of Credit Risk. The Company maintains cash in bank
accounts, which at times, may exceed federally insured limits. The Company has
not experienced any losses on these accounts.
Earnings (Loss) Per Share of Common Stock. Basic earnings (loss) per
common share is computed as net income (loss) divided by the weighted-average
number of common shares outstanding for the period. Diluted earnings per common
share include the potential dilution that would occur from common shares
issuable upon the exercise of outstanding stock options and warrants. Basic and
diluted earnings (loss) per common share are equal for all years presented
because the assumed exercise of options and warrants is antidilutive.
Recent Accounting Pronouncements
Goodwill and Other Intangible Assets. As of July 1, 2002, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142"). Under the new rules, goodwill and other
intangible assets deemed to have indefinite lives are no longer amortized, but
are subject to annual impairment tests in accordance with the Statement. Other
intangible assets with finite lives will continue to be amortized over their
useful lives. The goodwill amortization expense and net income (loss) of the
Company for the three years ended June 30, 2002 and the six months ended
December 31, 2001 and 2002 are as follows:
Six Months Ended
Year Ended June 30, December 31
--------------------------------------------------------------------------------
2000 2001 2002 2001 2002
--------------------------------------------------------------------------------
(Unaudited)
Reported net income $ (2,053,237) $ 89,336 $ (247,495) $ (199,575) $ 172,347
Goodwill amortization, net of
income taxes 89,000 87,297 73,000 48,434 -
--------------------------------------------------------------------------------
Adjusted net income (loss) $ (1,964,237) $ 176,633 $ (174,495) $ (151,141) $ 172,347
================================================================================
Earnings per common share, basic:
Reported net income (loss) $ (0.91) $ 0.04 $ (0.11) $ (0.09) $ 0.07
Goodwill amortization, net
of income taxes 0.04 0.04 0.03 0.02 -
--------------------------------------------------------------------------------
Adjusted net income $ (0.87) $ 0.08 $ (0.08) $ (0.07) $ 0.07
================================================================================
During the second quarter of fiscal year 2003, the Company completed
phase one of the transitional impairment test under Statement 142. Based on the
results of this test, management believes that the Company is likely to have an
impairment charge for one of its reporting units, which will approximate
$400,000 to $600,000. The Company will complete phase two of the transitional
impairment test before the end of fiscal year 2003, at which time it will record
the impairment charge as of July 1, 2002. There were no changes in the carrying
amount of goodwill for the six-months ended December 31, 2002.
Accounting for the Impairment or Disposal of Long-Lived Assets. As of
July 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("Statement 144"). Statement 144 supersedes and serves to clarify and further
define the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and provides a single accounting model for long-lived assets to
be disposed of.
F - 10
Statement 144 does not apply to goodwill and other intangible assets
that are not amortized, and retains the Company's current policy to recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair value
of the asset.
Reporting Extraordinary Items. In April 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections (Statement 145). Among other changes, Statement
145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary item,
net of the related tax effect. Statement 145 provides that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
are unusual or infrequent or they otherwise meet the criteria for classification
as an extraordinary item, and observes that debt extinguishment transactions
would seldom, if ever, result in extraordinary item classification of the
resulting gains and losses. The Company adopted Statement 145 in July 2002, and
reports as other expenses (income) any losses or gains that it incurs upon the
extinguishment of debt.
Accounting for Costs Associated with Exit or Disposal Activities. In
July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue
No. 94-3 Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity. Statement 146 requires that costs associated
with an exit or disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002,
with early application encouraged. The adoption of Statement 146 is not expected
to have a significant effect on the Company's results of operations and
financial position.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid interest of approximately $629,000, $553,000 and
$416,000 in 2000, 2001 and 2002, respectively. Additionally, interest of
$210,000 and $136,000 was paid for the six months ended December 31, 2001 and
2002, respectively.
3. RESTATEMENT
As discussed in Note 13, the Company entered into a merger with PlanetCAD Inc.
on November 19, 2002 whereby Avatech stockholders received three shares of
PlanetCAD for each share of PlanetCAD outstanding on the closing date. On
November 19, 2002, PlanetCAD Inc. changed its name to Avatech Solutions, Inc.
and assumed the June 30th year-end of Avatach. The merger constitutes a reverse
acquisition purchase in which Avatech is treated as the acquiror of PlanetCAD
for financial accounting purposes. As a result, the historical capital stock of
the Company has been retroactively restated to present as common stock the
equivalent number of shares received in the merger and to give effect to the
change in par value of the common stock received in the merger. All share and
per share data included in the consolidated financial statements have been
restated to reflect this transaction.
4. IMPAIRMENT LOSS
In fiscal year 2002, the Company determined that the goodwill and
other long-lived assets of one of its subsidiaries were likely impaired due to
recurring operating losses and changes in the estimates of the future estimated
cash flows from these operations over the remaining amortization period. The
Company determined that the carrying value of these assets exceeded their
estimated fair values by $285,374 and recorded an impairment loss in that
amount. The fair value of the long-lived assets was determined using discounted
cash flows over the remaining estimated useful life of the assets. Of the
recorded impairment loss of $285,374, $283,000 related to goodwill and the
remainder related to fixed assets.
F - 11
5. BORROWINGS UNDER LINE-OF-CREDIT
The Company has entered into a revolving line-of-credit agreement with
a financial institution which expires October 30, 2003, but is payable within 60
days of demand by the lender. The credit extended under this financing agreement
is limited to the lesser of $4.0 million or 75% of the Company's aggregate
outstanding eligible accounts receivable. The balance outstanding under this
line-of-credit was $1.4 million at December 31, 2002. Borrowings under this
line-of-credit bear interest at the prime rate plus 1.5% and are secured by the
assets of the Company. In addition, the bank has the right to restrict any
prepayment of other indebtedness by the Company.
Because the interest rate adjusts with changes in the prime rate, the
estimated fair value of the borrowings under the line of credit is equal to the
carrying amount.
6. LONG-TERM DEBT, WARRANTS AND GAIN ON THE EXTINGUISHMENT OF DEBT
At June 30, 2002, the Company was obligated to one of its suppliers
under a note agreement in the amount of $2.96 million, bearing interest at 6.5%
per annum. The note required interest only payments through September 30, 2001,
with subsequent quarterly payments of principal and interest of $621,311 until
maturity in December 2002. The Company was in default of specified financial
covenants at June 30, 2001, and the note was therefore classified as current at
that date. In August 2002, the Company entered into an agreement to extinguish
the outstanding $2.96 million debt for a cash payment of $1.0 million and
compliance with certain non-financial covenants. The Company obtained the $1.0
million due the lender from borrowings from a director and shareholder and from
PlanetCAD Inc., each in the amount of $500,000. These borrowings totaling $1.0
million bear interest at 15% per annum. The loan from the director and
shareholder matures on July 1, 2003 and is recorded as a note payable to related
party in the accompanying balance sheet at December 31, 2002. The loan from
PlanetCAD was due at the earlier of (i) the date on which Avatech became unable
or refused to complete the merger, or (ii) July 1, 2003. Accordingly, this note
was eliminated in consolidation when the Company completed its merger with
PlanetCAD on November 19, 2002. The gain on the extinguishment of the debt of
$1.96 million was recorded in August 2002 upon the settlement of the $2.96
million note for cash of $1.0 million and compliance with certain non-financial
covenants.
As of November 2002, the Company had issued approximately $1.8 million
of 10% subordinated notes. These notes bear simple interest at the rate of 10%
per annum until all principal and accrued and unpaid interest has been paid.
Interest only is payable quarterly until maturity. The notes are fully
subordinated to the payment of senior indebtedness (line-of-credit) of the
Company. In connection with the merger with PlanetCAD, Inc., approximately $1.5
million of subordinated notes were converted into 610,000 shares of preferred
stock in a subsidiary of the Company on November 19, 2002. (See Note 7).
As of December 31, 2002, the Company has outstanding warrants to
purchase 25,668 shares of common stock issued in connection with the 10%
subordinated notes that are exercisable for $15.46 per share and expire five
years after their date of issuance. Warrants for the purchase of 23,436 shares
and 372 shares of common stock will expire in 2003 and 2004, respectively. The
remaining 1,860 stock purchase warrants will expire in 2007. The number of
shares or exercise price will be adjusted in the event of any stock dividend,
stock splits, or recapitalization of the Company.
The warrants issued in conjunction with the 10% subordinated notes
were valued at $19,840, an estimate based on a valuation using the Black-Scholes
Pricing Model, a generally accepted warrant valuation methodology. The estimated
value of the warrants was recorded as additional paid-in capital and the notes
have been recorded net of a discount of $19,840. The estimated fair value of the
options was based on the Black-Scholes Pricing Model. The valuation assumptions
used included an expected life of five years; an expected price volatility of
0.10; no dividend yield; risk-free interest rate of 5.5%; and the stock price at
the date of grant of $11.42. At December 31, 2002, the balance outstanding under
the 10% subordinated notes was $248,388.
F - 12
7. MINORITY INTEREST
The Company has issued Series A Convertible Preferred Stock in one of
its subsidiaries. The Preferred Stock accrues dividends at a rate of 10% per
annum on the principal value. Dividends may be paid each quarter from available
cash of the subsidiary beginning October 1, 2002. The dividends of the
subsidiary's preferred stock is recorded as minority interest in the
consolidated statement of operations. All accrued but unpaid dividends shall be
paid in cash at or before a liquidation event as defined in the preferred stock
agreement. Each share of preferred stock shall automatically convert into 1.1
shares of Avatech Solutions, Inc. upon the earlier of (i) 24 months from the
issuance of the preferred stock or (ii) immediately preceding a liquidation
event. On all matters submitted to the stockholders of the Company, the shares
of Preferred Stock will vote together as a single class with the share of common
stock on a one share, one vote basis. The preferred stock is presented as
minority interest in the accompanying balance sheet at December 31, 2002.
8. EMPLOYEE STOCK PLANS
Effective April 2, 1998, the Company adopted the Avatech Solutions,
Inc. 1998 Stock Option Plan. Effective January 1, 2000, the Company adopted the
Avatech Solutions, Inc. 2000 Stock Option Plan. Both plans are administered by
the Board of Directors and provide for the granting of either qualified or
non-qualified stock options to purchase an aggregate of up to 279,000 shares of
common stock to eligible employees, officers, and directors of the Company. The
options granted under this plan vest in three equal installments on the
anniversary date of the grant over a three year period.
A summary of stock option activity and related information is included
in the table below:
Year Ended June 30,
2000 2001 2002
------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------
Outstanding at beginning of year 63,880 $ 11.42 102,040 $ 11.42 148,497 $ 11.42
Granted 64,892 11.42 65,604 11.42 157,364 11.42
Exercised - - - - - -
Forfeited (26,732) 11.42 (19,147) 11.42 (47,211) 11.42
------------------------------------------------------------------------------
Outstanding at end of year 102,040 $ 11.42 148,497 $ 11.42 258,650 $ 11.42
==============================================================================
Exercisable at end of year 35,526 $ 11.42 69,374 $ 11.42 140,761 $ 11.42
==============================================================================
Weighted-average fair value of
options granted during the year $ 3.17 $ 2.55 $ 1.77
========== ========== ==========
Weighted-average remaining
contractual life 9.2 Years 8.8 Years 8.7 Years
========== ========== ==========
Pro Forma Information
Year Ended June 30,
-----------------------------------------------
2000 2001 2002
-----------------------------------------------
Net income (loss)--historical $ (2,053,237) $ 89,336 $ (247,495)
Net (loss) income--pro forma $ (2,163,510) $ (99,456) $ (363,857)
Basic and diluted net income (loss) per common
share--historical $ (0.91) $ 0.04 $ (0.11)
Basic and diluted net (loss) per common share--pro forma $ (0.96) $ (0.04) $ (0.16)
F - 13
For the three years ended June 30, 2002, required pro forma net income
(loss) and income (loss) per share information assuming that stock options were
recorded at their fair value at the grant date was determined using the minimum
value method. The minimum value method calculates the fair value of options as
the excess of the estimated fair value of the underlying stock at the date of
grant over the present value of both the exercise price and the expected
dividend payments, each discounted at the risk-free rate, over the expected life
of the option. In determining the estimated fair value of granted stock options
under the minimum value method, the risk-free interest rate was assumed to be
5.5%, 5.21%, and 4.48% in 2000, 2001 and 2002, respectively, the dividend yield
was estimated to be 0% and the expected life of granted options was assumed to
be five years.
Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the minimum value
method and other methods of estimating fair value do not necessarily provide a
single measure of the fair value of its employee stock options.
Effective May 1, 1998, the Company adopted the 1998 Employee Stock
Purchase Plan for all employees meeting certain eligibility requirements. Under
the Plan, employees may purchase shares of the Company's common stock, subject
to certain limitations, at 85% of its market value as determined by the Board of
Directors. Purchases are limited to 10% of an employee's eligible compensation.
A total of 55,800 shares are available for sale to employees under this Plan.
The Board of Directors authorized the suspension of this Plan in March 2000.
During 2000, the Company sold approximately 6,997 shares to employees under this
Plan. The Plan does not contain a provision requiring the Company to repurchase
shares from terminated employees. However, the Company elected to purchase
11,742 shares for $113,381 in 2001 and 6,751 shares for $65,529 in 2002 from
former employees.
At June 30, 2002, the Company has reserved 302,808 shares of common
stock for future issuance upon the exercise of any stock options granted under
the 1998 and 2000 Stock Option Plans and upon the exercise of outstanding
warrants.
9. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
June 30,
-----------------------------
2001 2002
-----------------------------
Deferred tax assets:
Net operating loss carryforward $ 1,688,082 $ 1,860,991
Allowance for doubtful accounts 81,974 43,214
Accrued vacation pay 1,822 -
Book over tax depreciation 76,571 77,341
-----------------------------
Total deferred tax assets 1,848,449 1,981,546
Valuation allowance for deferred tax assets (1,848,449) (1,608,546)
-----------------------------
Net deferred tax assets $ - $ 373,000
=============================
As of June 30, 2001, the Company recorded a valuation allowance equal
to its deferred tax assets due to the inability to conclude that it was more
likely than not that those assets would be realized from future taxable income.
In August 2002, as described more fully in Note 6, the Company realized a $1.96
million taxable gain from the extinguishment of certain debt. This gain provided
significant evidence of the likelihood of taxable income in fiscal year 2003,
and the Company therefore at June 30, 2002 recorded a valuation allowance of
$1.6 million that resulted in net deferred tax assets of $373,000, or the amount
that management estimated was likely to be realizable from taxable income in
2003. The ultimate amount of the net operating loss carryforward used to reduce
2003 taxable income may ultimately differ from the amount estimated, and it is
reasonably possible that the difference may be material.
F - 14
The Company's provision for income taxes resulted in effective tax
rates that varied from the statutory federal income tax rate of 34%, as
summarized in the table below.
Year Ended June 30,
2000 2001 2002
------------------------------------------------
Expected federal income tax expense (benefit) at 34% $ (698,100) $ 30,374 $ (181,048)
Expenses not deductible for income tax purposes 47,419 26,879 153,566
State income taxes, net of federal benefit (94,860) 8,580 (24,601)
Change in valuation allowance for deferred taxes 735,900 (54,441) (239,903)
Other 9,641 1,608 6,986
------------------------------------------------
$ - $ 13,000 $ (285,000)
================================================
At June 30, 2002, the Company has net operating loss carryforwards
totaling approximately $4,800,000, which will begin to expire in 2012. Certain
net operating loss carryforwards at June 30, 2002, are related to subsidiaries
of the Company, and are available only to offset future taxable income of those
subsidiaries.
During the six months ended December 31, 2002, the Company recorded
deferred income tax expense of $373,000 related to the estimated reduction in
deferred tax assets in fiscal 2003. This increase in deferred income tax expense
coupled with certain state income tax expense resulted in the additional income
tax expense for the six months ended December 31, 2002. The Company estimates
that its total income tax expense in fiscal year 2003 will approximate $425,000.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases certain office space and
equipment under noncancellable operating lease agreements that expire in various
years through 2006, and generally do not contain significant renewal options.
The Company also leases one office location from an entity controlled by a
stockholder under a noncancellable operating lease, which expires in 2003.
Future minimum payments under all noncancellable operating leases with initial
terms of one year or more consisted of the following at June 30, 2002:
Related
Year ended June 30 Party Other Total
------------------------------------------
2003 $ 42,552 $ 821,490 $ 864,042
2004 - 469,621 469,621
2005 - 115,934 115,934
2006 - 25,515 25,515
------------------------------------------
Total minimum lease payments $ 42,552 $ 1,432,560 $ 1,475,112
==========================================
2000 2001 2002
------------------------------------------
Office space $ 1,009,056 $ 1,066,818 $ 1,162,344
Equipment 99,915 69,132 40,361
------------------------------------------
$ 1,108,971 $ 1,135,950 $ 1,202,705
==========================================
Rent expense for the years ended June 30, 2000, 2001 and 2002 included
amounts paid to related parties of approximately $82,000, $83,000 and $85,000,
respectively.
Agreements with Executives. The Company has entered into agreements
with three executives that provide for payments of eighteen months of salary and
immediate vesting of all stock options not previously vested upon termination of
the executive or change in control of the Company, as defined. At December 31,
2002, the total contingency was approximately $500,000.
F - 15
Litigation. On May 21, 2002, a former employee filed a lawsuit against
the Company alleging breach of employment contract in connection with the former
employee's dismissal. The lawsuit alleges damages in the amount of $187,500.
This lawsuit was settled for an agreed upon cash payment.
11. EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS
Effective January 1, 1998, the Company adopted the Avatech Solutions,
Inc. 401(k) Retirement Savings Plan and Trust (the "Plan"). The Plan is a
defined contribution plan, which covers substantially all employees of the
Company, or its wholly-owned subsidiaries, who have attained age 21 and have
completed 6 months of service. Participants may elect to contribute from 1% to
15% of eligible annual compensation to the Plan. Maximum salary deferrals are
currently $10,000 per year. The Company will match 25% of the participant salary
deferrals up to 6% of a participant's compensation for all participants employed
on the last day of the Plan year. The Company may also make discretionary
profit-sharing contributions to the Plan for all participants who are employed
on the last day of the Plan year. The total amount recorded by the Company as
expense during the years ended June 30, 2000, 2001 and 2002, was approximately
$86,000, $79,000 and $62,000, respectively. The Company did not contribute to
the plans for the six months ended December 31, 2001 and 2002, respectively.
12. SIGNIFICANT SUPPLIER
Approximately 80%, 87% and 92% of the Company's purchases for the
years ended June 30, 2000, 2001 and 2002, respectively, were from one vendor and
approximately 85% and 81% of accounts payable at June 30, 2001 and 2002,
respectively, were due to this vendor.
The Company's purchases for the six months ended December 31, 2002
were 95% from this same vendor and approximately 60.0% of accounts payable at
December 31, 2002 were due to this vendor.
13. BUSINESS COMBINATION - MERGER WITH PLANETCAD, INC. (UNAUDITED)
On November 19, 2002, the Company consummated a merger with PlanetCAD
Inc., whereby shareholders of the Company exchanged their shares of the
Company's common stock for common stock of PlanetCAD. Upon completion of the
merger, the shareholders of the Company owned 75% of the outstanding common
stock of PlanetCAD. PlanetCAD develops, markets, and supports cycle time
reduction software solutions that integrate engineering processes and data for
the manufacturing supply chain. In connection with the merger, options and
warrants to purchase the common stock of the Company were converted into options
and warrants to acquire common stock of the post-merger entity based on the
merger exchange ratio.
For accounting purposes, the Company was deemed to have acquired
PlanetCAD, as its shareholders own a majority of the outstanding common stock of
the surviving entity. Upon the completion of the merger, the Company has
2,965,958 shares of outstanding common stock, 2,220,670 of which were issued to
shareholders of Avatech upon the closing date. The results of operations of
PlanetCAD are included in the accompanying statements of operations since
November 1, 2002 or the effective date of the merger. The purchase method of
accounting was used to record the acquisition, and the cost of acquiring
PlanetCAD of $2.2 million, including estimated acquisition costs of $1.0
million, was assigned to acquired assets and liabilities based on their
estimated fair value, as determined by an independent appraisal. The Company has
not finalized the allocation process as management continues to negotiate with
service providers over certain merger costs. Accordingly, the allocation of the
purchase price is preliminary, however; management believes that the final
purchase price will not vary significantly from the preliminary allocation
included in the accompanying consolidated financial statements. The purchase
price allocation to acquired assets and liabilities at the acquisition date is
summarized below:
F - 16
ASSETS
Cash $ 995,000
Accounts receivable 155,000
Prepaid expenses and other current assets 611,000
Property and equipment 337,000
Acquired technology and other amortizable intangible assets 686,000
Goodwill 120,000
--------------
Total assets 2,904,000
--------------
LIABILITIES
Accounts payable and accrued expenses 720,000
Deferred revenue 229,000
--------------
Total liabilities 949,000
--------------
Cost of net assets acquired, excluding acquired in-process
research and development assets of $282,000 $ 1,955,000
==============
The value allocated to projects identified as in-process research and
development of PlanetCAD products was charged to expense immediately following
the completion of the merger. This write-off was necessary because the acquired
in-process research and development had not yet reached technological
feasibility and has no future alternative uses, and the related products under
development may not achieve commercial viability. The value of acquired
technology was determined by taking into account risks related to the
characteristics and applications of the developed technology, existing and
future markets and assessments of the stage of the developed technology's life
cycle. This analysis resulted in a valuation for developed technology that had
reached technological feasibility and therefore was capitalized. The developed
technology and other intangible assets are being amortized on a straight-line
basis over 4 to 6 years.
The following summarizes the unaudited pro forma statements of
operations information for the years ended June 30, 2001 and 2002 and the six
months ended December 31, 2001 and 2002, assuming that the acquisition was
completed on July 1, 2001. The in-process research and development charge is
excluded from the pro forma statements of operations information because the
charge is non-recurring. The results are not necessarily indicative of what
would have occurred had this transaction been consummated as of the beginning of
the period nor of future operations:
Year ended June 30 Six Months Ended December 31
-----------------------------------------------------------------
2001 2002 2001 2002
-----------------------------------------------------------------
Revenue $ 33,396,903 $ 31,580,291 $ 16,210,638 $ 12,708,132
Net loss $ (14,130,629) $ (8,210,294) $ (5,368,575) $ (1,466,778)
Loss per common share, basic and diluted $ (4.87) $ (2.80) $ (1.86) $ (0.51)
14. LIQUIDITY AND CAPITAL RESOURCES
As discussed more fully in Note 13, in November 2002, the Company
completed the acquisition of PlanetCAD, Inc. In connection with the acquisition,
the Company incurred approximately $1.0 million of merger costs, and PlanetCAD
incurred approximately $1.3 million of merger costs. These costs have reduced
the amount of working capital that the Company has available for its operations.
Management is currently negotiating with service providers to reduce the amounts
billed and extend the terms for payment of unpaid obligations related to the
merger. One of the Company's directors has expressed their intention of lending
the Company up to $500,000 to fund any needed working capital deficiencies.
Based on an evaluation of the likely cash generated from operations in the near
term, available capital resources and the timing of cash payments to vendors,
management believes that it has sufficient sources of working capital to fund
its operations in the normal course of business through at least June 30, 2003.
The Company has engaged an investment banking firm to assist in obtaining
long-term financing. Additionally, the Company plans to raise between $1.0
million to $2.0 million of short term financing on acceptable terms by June 30,
2003.
F - 17
ANNEX A: AVATECH SOLUTIONS, INC. RESTRICTED STOCK AWARD PLAN
Section 1. Purpose. The Avatech Solutions, Inc. Restricted Stock
Award Plan (the "Plan") is intended to provide incentives which will attract and
retain highly competent persons as officers, directors, key employees and
consultants of Avatech Solutions, Inc. (the "Company") and its present or future
subsidiaries ("Subsidiaries"), by providing them with opportunities to acquire
common stock of the Company, par value par value $0.01 per share ("Common
Stock") pursuant to terms and restrictions contained in this Plan and in an
agreement with the Company (an "Award").
Section 2. Administration. The Board of Directors ("Board") of
the Company shall supervise and administer the Plan.
2.1. The Board will resolve any questions of
interpretation of the Plan or of any Awards, and such determination shall be
final and binding upon all persons.
2.2. A Committee of the Board of Directors comprised
solely of two non-employee directors (within the meaning of Rule 16b-3 under the
Exchange Act of 1934, 17 C.F.R. Section 240.16b-3(b)(3)) (the "Committee") shall
have any or all of the powers and discretions vested in the Board under the
Plan, except the power to amend or terminate the Plan. Any determination of the
Committee under the Plan may be made without notice or meeting of the Committee,
by a writing signed by a majority of the Committee members.
Section 3. Awards. "Award Shares" are shares of Common Stock
transferred to Participants (as defined in 3.2.3) pursuant to an Award in
exchange for past or future service to the Company or its Subsidiaries without
other payment therefor.
3.1. Governing Agreements. Each Award will be governed
by an "Award," which may contain any provision the Board determines appropriate,
including without limitation, provisions for the forfeiture of and restrictions
on the sale, resale or other disposition of shares acquired under any Award,
provisions giving the Company the right to repurchase shares acquired under any
Award, provisions to comply with federal and state securities laws, or
understandings or conditions as to the Participant's employment, in addition to
those specifically provided for under the Plan.
3.2. Nontransferability. Except as provided below or as
explicitly provided in the Award, a Participant may not transfer Common Stock
represented by an Award that is subject to forfeiture, redemption or other
restriction on resale imposed by its governing Award ("Unvested Shares").
3.2.1. Unvested Shares (i) may be tendered in
response to a tender offer for a request or invitation to tenders of greater
than 50 percent of the outstanding Common Stock of the Company or (ii) may be
surrendered in a merger, consolidation or share exchange involving the Company;
provided, in each case, that the securities or other consideration (including
any cash) received in exchange for the Unvested Shares will be subject to the
restrictions and conditions on the Unvested Shares set forth in the Award. In
the event of and immediately upon receipt by a third party of Unvested Shares by
any person or entity other than the Company pursuant to a transaction under this
Section 3.2, the Unvested Shares will no longer be subject to restrictions on
transfer, sale, assignment, etc. imposed by this Plan or any Award.
3.2.2. In the event of any change in the
outstanding Common Stock resulting from a subdivision or consolidation of
shares, whether through reorganization, recapitalization, share split, reverse
share split, share distribution or combination of shares or the payment of a
share dividend, the Unvested Shares shall be treated in the same manner in any
such transaction as other Common Stock. Any Common Stock or other securities
received by the Grantee with respect to the Unvested Shares in any such
transaction shall be subject to the restrictions and conditions set forth in
this Award.
3.2.3. In the event that Unvested Shares are
transferred by will or the laws of descent and distribution, any payments shall
be made only to the executor or administrator of the estate of the
A - 1
deceased Participant or the person or persons to whom the deceased Participant's
rights under the Award shall pass by will or the laws of descent and
distribution and only to the extent, if any, that the deceased Participant was
entitled at the date of the Participant's death.
Section 4. Participants. The Board, in its sole discretion, will
designate "Participants" to receive Award Shares. Notwithstanding this
authority, the Board may designate as Participants only natural persons who:
4.1. are employees, officers, directors, or consultants
of the Company or one of its Subsidiaries and immediately prior to receiving the
designated Award, are owners of common stock or options to purchase common stock
of the Company; or
4.2. are officers or directors of the Company regardless
of ownership of any common stock or options to purchase common stock of the
Company.
Award Shares may be granted under this Plan to persons who have previously
received Award Shares or other benefits under this or other plans of the
Company.
Section 5. Shares Reserved Under the Plan. There is hereby
reserved for issuance as Award Shares under the Plan an aggregate of 200,000
shares of Common Stock, which may be authorized but unissued or treasury shares.
5.1. Reissue of Shares. Any shares of Common Stock
subject an Award may thereafter be subject to a new Award under the Plan if the
shares of Common Stock are issued under an Award and are subsequently reacquired
by the Company pursuant to the terms of the Award.
5.2. Adjustment Provisions. If the Company at any time
changes the number of issued shares of Common Stock without new consideration to
the Company (by stock dividend, stock split, or a similar transaction), the
total number of shares reserved for issuance under the Plan and the number of
shares covered by each outstanding Award shall be adjusted so that the value of
each such Award shall not be changed. Awards may contain provisions for their
continuation or for other equitable adjustments after changes in the Common
Stock resulting from reorganization, sale, merger, consolidation or similar
occurrences.
Section 6. Valuation. The fair market value of the Award Shares
on any given day will be:
6.1. if the Common Stock is listed on a national
securities exchange, the mean between the highest and lowest sale prices
reported as having occurred on the primary exchange with which the Stock is
listed and traded on the date prior to such date, or, if there is no such sale
on that date, then on the last preceding date on which such a sale was reported;
6.2. if the Common Stock is not listed on any national
securities exchange but is quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, the average between the high bid price and low ask price reported on the
date prior to such date, or, if there is no such sale on that date, then on the
last preceding date on which a sale was reported;
6.3. if the common stock is listed on the OTC Bulletin
Board, the last closing price of the common stock of the Company on the OTC
Bulletin Board as of the close of business on the last business day prior to the
date on which the shares are to be valued.
6.4. if the Common Stock is not listed on a national
securities exchange nor quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, nor listed on the OTC Bulletin Board, the most recent price at which
shares of the Company's common stock traded in any recognized securities market.
A - 2
6.5. if the Common Stock is not listed on a national
securities exchange nor quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, nor listed on the OTC Bulletin Board, nor traded in any recognized
securities market, the amount determined by the Board to be the fair market
value based upon a good faith attempt to value the Stock accurately and computed
in accordance with applicable regulations of the Internal Revenue Service; or
6.6. in the event of a transaction pursuant to judicial
order, state law, or a vote of the majority of the Company's shareholders which
results in receipt of value by the shareholders in exchange for their shares of
common stock, that same amount received by the shareholders.
Section 7. No Employment Agreement. Neither this Plan nor any
Award are, nor should either be construed to embody or contain, an agreement or
promise of future employment of the Participant by the Company or its
Subsidiaries. A Participant's right, if any, to continue to serve the Company or
its Subsidiaries as an officer, employee or otherwise, shall not be enlarged or
otherwise affected by the Plan.
Section 8. Duration, Amendment and Termination.
8.1. The Board may not grant Award Shares more than ten
years after the date on which the Plan is adopted by the Board; provided,
however, that the terms and conditions of any Award may thereafter be amended or
modified by mutual agreement between the Company and the Participant or such
other persons as may then have an interest in the Award.
8.2. The Board, pursuant to a mutual agreement between
the affected Participant and the Company, may grant Award Shares under the Plan
or any future plan of the Company in substitution and in exchange for, and in
cancellation of, any previously-granted Award Shares.
8.3. The Board may amend the Plan from time to time or
terminate the Plan at any time. However, no action authorized by this paragraph
shall reduce the amount of any existing Award or change the terms and conditions
thereof without the Participant's consent. No amendment of the Plan shall,
require the approval of the stockholders of the Company, except to the extent
required by law, regulation or stock exchange requirements.
A - 3
[Back Cover]
UNTIL _____, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION OT THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION:
The following table sets forth the fees and expenses, other than any
underwriting discounts and commissions incurred by us in connection with the
issue and distribution of the common stock being registered. Items marked with
asterisks (*) are estimated fees as of the date of this filing.
Item Cost
- ----
Accounting Fees $15,000*
Costs of Printing $5,000*
Legal Fees $40,000
Registration Fees $234.63
Federal Taxes $0
State Taxes and Fees $0
Trustees' and Transfer Agents' Fees $0
Expenses Borne by Security Holder $0
Premium on Indemnification Policy $0
ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware General Corporation Law, a corporation shall have the
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the person is
or was a director, officer, employee, or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit, or proceeding if the person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
Although Delaware General Corporation Law permits a corporation to
indemnify any person referred to above against expenses (including attorney
fees) that are actually and reasonably incurred by such person ("Expenses"), in
connection with the defense or settlement of an action by or in the right of the
corporation, provided that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the corporation's best
interests, if such person has been judged liable to the corporation,
indemnification for such expenses is only permitted to the extent that the Court
of Chancery, or the court in which the action or suit was brought, determines
that, despite the adjudication of liability, such person is entitled to
indemnity for such Expenses as the Court of Chancery, or such other court, deems
proper.
The determination, with respect to a person who is a director of
officer at the time of such determination, as to whether a person seeking
indemnification has met the required standard of conduct is to be made (i) by a
majority vote of the directors who are not parties to such action, suit, or
proceeding, even though less than a quorum, or (ii) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (iii) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (iv) by the stockholders.
II - 1
Delaware General Corporation Law also provides that to the extent that
a present or former director or officer of a corporation has been successful on
the merits or otherwise in the defense of any action, suit, or proceeding
covered by the statute, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith. In addition, Delaware General Corporation Law provides for
the general authorization of advancements of a director's or officer's
litigation expenses, subject to an undertaking by such person to repay any such
advancement if such person is ultimately found not to have been entitled to
reimbursement for such expenses and that indemnification and advancement of
expenses provided by the statute shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. Avatech's Restated certificate of incorporation
provides that Avatech shall indemnify its directors, officers, employees, and
agents to the fullest extent permitted by Delaware General Corporation Law.
Avatech also is authorized to secure insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, Avatech
maintains liability insurance for the benefit of its directors and officers.
ITEM 15: RECENT SALE OF UNREGISTERED SECURITIES
Terms of
Number Exemption Exercise
of Purchase from (for Use of
Date Title/Class Shares Name of Purchaser Price Registration options) Proceeds
- ---- ----------- ------ ------------------------------ -------- ------------ -------- ---------------
2/22/03 Series C Preferred 15,000 Dennis Oldorff Trustee for 25,350 4(2) N/A Working Capital
Stock Dennis Oldorff Revocable Trust
2/22/03 Series C Preferred 14,792 Richard D. & Marlyce Larsen 25,000 4(2) N/A Working Capital
Stock
2/22/03 Series C Preferred 14,792 Gary Jones 25,000 4(2) N/A Working Capital
Stock
ITEM 16: EXHIBITS AND FINANCIAL SCHEDULES
(a) EXHIBITS
EXHIBIT PAGE NO./
NO. EXHIBIT DESCRIPTION (REFERENCE)
2.1 Agreement and Plan of Merger (S)
3.1 Restated Certificate of Incorporation (SB)
3.2 First Amendment to Restated Certificate of Incorporation (SB)
3.3 Reverse Split Amendment to Restated Certificate of Incorporation (S)
3.4 Amendment of PlanetCAD's Certificate of Incorporation to change the name of PlanetCAD Inc. to
Avatech Solutions, Inc. (S)
3.5 Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (A)
3.6 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock (K1)
3.7 By-Laws (SB)
5.1 Opinion of Neuberger, Quinn, Gielen, Rubin & Gibber, P.A. regarding the legality of the shares E - 1
of common stock being registered
10.01 Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and (S)
Autodesk, Inc. effective as of February 1, 1997 and as later amended on February 1, 2002
10.02 Bentley Reseller Agreement by and among Avatech Solutions, Inc. and Bentley Systems, (S, T)
Incorporated dated June 11, 2001 and as later amended on March 15, 2002
II - 2
EXHIBIT PAGE NO./
NO. EXHIBIT DESCRIPTION (REFERENCE)
10.03 CIT Revolving Line of Credit Agreement by and among CIT Group/Business Credit, Inc. and Avatech (S)
Solutions, Inc. and its subsidiaries dated October 25, 2000, in the amount up to $4,000,000
10.04 Warrant to purchase up to 16,213 shares of Common Stock issued by Avatech to CIT Group/Business (S)
Credit, Inc. dated October 25, 2000
10.05 Warrantholders Rights Agreement by and among CIT Group/Business Credit, Inc. and Avatech (S)
Solutions, Inc. and its subsidiaries dated October 25, 2000
10.06 Autodesk Loan Agreement by and among Autodesk, Inc. and Avatech Solutions, Inc. and its (SA2)
subsidiaries dated January 25, 1999
10.07 Autodesk Subordination Agreement by and among Autodesk, Inc., Avatech Solutions, Inc. and its (S)
subsidiaries, and CIT Group/Business Credit, Inc., dated October 25, 2000
10.08 Master Lease Agreement by and between Allstate Leasing, Inc. and Avatech Solutions, Inc. dated (S)
July 17, 2001
10.09 Form of 10% Subordinated Note with attached Warrant issued by Avatech Solutions, Inc. to (S)
certain note holders in connection with Avatech Solutions, Inc.'s 1998 $2,600,000 Subordinated
Debt Offering
10.10 Avatech Solutions Subsidiary, Inc. 1998 Stock Option Plan (S)
10.11 Avatech Solutions Subsidiary, Inc. 2000 Stock Option Plan (S)
10.12 2002 Stock Option Plan (S)
10.13 Restricted Stock Award Plan (included in Annex A) A-1
10.14 Avatech Solutions, Inc. Stockholders' Agreement by and among Avatech Solutions, Inc. and (S)
certain stockholders of Avatech Solutions, Inc. who acquired shares of Avatech Solutions, Inc.
common stock under Avatech Solutions, Inc.'s terminated employee stock purchase plan
10.15 Severance Agreement dated February 26, 1998, and made effective January 1, 1998, by and between (S)
Avatech Solutions, Inc. and Henry D. Felton
10.16 Severance Agreement dated February 27, 1998, and made effective January 1, 1998, by and between (S)
Avatech Solutions, Inc. and V. Joel Nicholson
10.17 Letter Agreement dated July 25, 2000, by and between Avatech Solutions, Inc. and A. Gary Rever (S)
10.18 Settlement Agreement between Autodesk and Avatech Solutions, Inc. dated August 14, 2002 (SA3)
10.19 Senior Subordinated Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, (SA2)
Inc. in favor of PlanetCAD Inc
10.20 Senior Subordinated Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, (SA2)
Inc. in favor of W. James Hindman
II - 3
EXHIBIT PAGE NO./
NO. EXHIBIT DESCRIPTION (REFERENCE)
10.21 Subordination Agreement by and among PlanetCAD Inc., Avatech Solutions, Inc., Technical (K2)
Learningware Company, Inc. and CIT Group/Business Credit, Inc. dated August 14, 2002
10.22 Subordination Agreement by and among W. James Hindman, Avatech Solutions, Inc., Technical (SA2)
Learningware Company, Inc. and CIT Group/Business Credit, Inc. dated August 13, 2002
10.23 Change in Control Agreement between PlanetCAD and David Hushbeck dated November 2001, as amended (SA3)
10.24 Change in Control Agreement between PlanetCAD and Joy Godesiabois dated November 2001, as (SA3)
amended
10.25 Employment Agreement by and between Donald R. "Scotty" Walsh and Avatech Solutions, Inc. dated E - 3
December 2, 2002
15.1 Letters regarding unaudited interim financial information (included with financial statement II - 5
schedules)
21.1 Subsidiaries of the Registrant E - 8
23.1 Consent of Ernst & Young LLP E - 9
23.2 Consent of Walpert and Wolpoff, LLP E - 10
23.3 Consent of Neuberger, Quinn, Gielen, Rubin & Gibber, P.A. (included in Exhibit 5.1) E - 1
24.1 Power of attorney (included on signature page) II - 8
99.1 Current Report on Form 8-K filed on January 31, 2002 (K3)
- ----------
A Incorporated by reference to the Registrant's Registration Statement on
Form 8-A, filed on March 11, 2002.
K1 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on May 28, 2002.
K2 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on August 21, 2002.
K3 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on January 31, 2003.
S Incorporated by reference to the Registrant's form S-4 filed on May 30,
2002.
SA2 Incorporated by reference to the Registrant's amended form S-4 filed on
September 13, 2002.
SA3 Incorporated by reference to the Registrant's amended form S-4 filed on
September 27, 2002.
SB Incorporated by reference to the Registrant's registration statement on
form SB-2 filed on November 21, 2000.
T Terminated.
II - 4
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
REPORTS OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders
Avatech Solutions, Inc.
We have audited the consolidated financial statements of Avatech
Solutions, Inc. as of June 30, 2002 and for the year then ended, and have issued
our report thereon dated September 3, 2002 (except Note 3 and 14, as to which
the date is March 10, 2003) (included elsewhere in this Registration Statement).
Our audit also included the 2002 amounts included in the financial statement
schedule responsive to Item 21(b) of this Registration Statement. This schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit.
In our opinion, the 2002 amounts in the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Baltimore, Maryland
September 3, 2002
The Board of Directors and Stockholders
Avatech Solutions, Inc.
We have audited the consolidated financial statements of Avatech
Solutions, Inc. as of June 30, 2001 and 2000 and for the years then ended, and
have issued our report thereon dated October 3, 2001 (except Note 3 and 14,
as to which the date is March 10, 2003) (included elsewhere in this Registration
Statement). Our audit also included the 2001 and 2000 amounts included in the
financial statement schedule responsive to Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the 2001 and 2000 amounts in the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Walpert & Wolpoff, LLP
Baltimore, Maryland
October 3, 2001
II - 5
Avatech Solutions, Inc. and Subsidiaries Valuation and qualifying accounts
Additions
---------
Charged to
Balance at Charged to other
beginning costs and accounts Deductions Balance at
Description of period expenses - describe - describe end of period
Year Ended June 30, 2002:
Deducted from assets accounts:
Allowance for doubtful accounts: ........ $ 212,000 $ 76,000 $ - $ (176,000)/1/ $ 112,000
Year Ended June 30, 2001:
Deducted from assets accounts:
Allowance for doubtful accounts: ........ $ 282,000 $ 7,000 $ - $ (77,000)/1/ $ 212,000
Year Ended June 30, 2000:
Deducted from assets accounts:
Allowance for doubtful accounts: ........ $ 83,000 $ 289,000 $ - $ (90,000)/1/ $ 282,000
/1/ Uncollectible accounts written off, net of recoveries.
ITEM 17: UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
a. To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
b. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in the volume
of securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
c. To include any material information with respect to any
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold t the
termination of the offering.
4. The undersigned registrant hereby undertakes to deliver or
cause to be delibered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to
II - 6
each person to whom the prospectus in sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide such
interim financial information.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Owings Mills, State of
Maryland on March 26, 2003.
AVATECH SOLUTIONS, INC.
By: /s/ Donald R. Walsh
---------------------------------
Donald R. "Scotty" Walsh
Chief Executive Officer
II - 7
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Donald R. "Scotty" Walsh and Gary Rever as his attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
from such person and in each person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, or any registration statement relating to this
registration statement under Rule 462 of the Securities Act and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-1 has been signed on March 26,
2003 by the following persons in the capacities indicated:
Name Title Date
- ---- ----- ----
/s/ Donald Walsh Chief Executive Officer and Director March 26, 2003
- -------------------------------------
Donald "Scotty" Walsh
/s/ Gary Rever Chief Financial Officer March 26, 2003
- -------------------------------------
Gary Rever
/s/ W. James Hindman Chairman of the Board March 26, 2003
- -------------------------------------
W. James Hindman
/s/ Hank Felton Vice Chairman of the Board March 26, 2003
- -------------------------------------
Hank Felton
/s/ Eugene J. Fischer Director March 26, 2003
- -------------------------------------
Eugene J. Fischer
/s/ James A. Fanella Director March 26, 2003
- -------------------------------------
James A. Fanella
/s/ John W. Sasser Director March 26, 2003
- -------------------------------------
John W. Sasser
II - 8