Unrest at Avatech

You may recall that Avatech Solutions, like many companies in the engineering software space, had a difficult 2008/2009 in response to the economic realities faced by its government, AEC and manufacturing customers. The company rebounded a bit in its last reported quarter (ended December 31, 2009), seeing an increase in profits even though revenue declined — albeit at a slower pace than earlier in 2009. As I wrote at the time, “Investment analysts on the call praised the executive team for its tight control of costs in uncertain times and the executives, in turn, were cautiously optimistic about the future. As a result, Avatech shares were up 46% for the day.”

But not all shareholders share the joy. In fact, a group of Avatech Solutions shareholders on March 5 submitted a 13D filing to the SEC in which they disclosed their intention "to effectuate a sale of all shares of the Issuer owned by members of the Group, to influence, and if possible work with, management of the Issuer to pursue strategies with the purpose of enhancing shareholder value, including but not limited to a merger, sale, or reorganization involving the Issuer, and to contact other shareholders regarding potential strategies to increase shareholder value, and/or to engage in discussions with third parties with respect to these."

Avatech’s largest shareholder is not a part of the 13D. Thom Waye, Chairman of the Board of Directors of Avatech Solutions and Managing Partner of the Sigma Opportunity Fund, said that Avatech is a “well capitalized, practically debt free company with strong cash flows, a healthy balance sheet and a strong income statement… Currently, we have exceptional management, tight and efficient capital and expense structures and are poised to execute our strategic plan and deliver more profit to the bottom line than ever before."

In an announcement today, Avatech said that it is not currently working with this group and that the group “has not attempted to make contact with Management or the Board of Directors to inform them of any specific intentions or to engage in any dialogue.” Avatech CEO George Davis said that the company believes its current strategic plan is in the best interest of all shareholders, including those who filed the 13D.

In addition, said Mr. Davis, “Over the last two years, we have explored various opportunities but we ultimately determined they would not affordably support our objectives of cost and revenue synergies and positive income contribution. We intend to continue our aggressive search of the market for the right opportunities and remain committed to the execution of our current strategic plan."

So what does it all mean? The 13D investors are all former employees CEOs of Avatech and jointly own 17.2% of the company’s shares. That’s enough to pressure for change but not enough to sell the company without bringing other shareholders on board. It’s likely that the 13D investors have an agenda that they will make known in the course of time — remember that Elliott Associates started agitating for a change at MSC well in advance of the eventual sale. A different group of investors pressured Intergraph for a long time before its eventual acquisition. But it’s also true that these things just as often lead to no visible external changes; management and the dissatisfied shareholder come to some sort of agreement

The first shots have been fired. Where this ends up is anybody’s guess.