UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-18672
ZOOM TELEPHONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Canada 04-2621506
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
- --------------------------------------- -----
(Address of Principal Executive Offices in the U.S.) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the registrant's Common Stock, No Par Value,
as of August 14, 1998 was 7,474,871 shares.
<PAGE>
ZOOM TELEPHONICS, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997
Consolidated Statements of Operations for the Three
Months Ending June 30, 1998 and 1997
Consolidated Statements of Operations for the Six
Months Ending June 30,1998 and 1997
Consolidated Statements of Cash Flows for the Six
Months Ending June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and reports on Form 8-K
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ZOOM TELEPHONICS, INC.
Consolidated Balance Sheets
6/30/98 12/31/97
ASSETS (Unaudited) (Audited)
----------- ---------
Current assets:
Cash and cash equivalents $ 16,380,005 $ 11,281,337
Accounts receivable, net of reserves
for doubtful accounts, returns, and
allowances of $5,162,141 at 6/30/98 and
$4,518,206 at 12/31/97 7,617,684 13,365,413
Inventories 9,862,648 12,034,349
Recoverable income taxes 294,378 3,793,963
Deferred income taxes 2,514,348 2,388,189
Prepaid expenses and other assets 231,582 212,989
------------- -------------
Total current assets 36,900,645 43,076,240
Property and equipment, net 3,879,641 3,967,767
Goodwill 1,307,930 1,393,874
Other non-current assets 15,515 77,392
$ 42,103,731 $ 48,515,273
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,669,798 6,204,370
Accrued expenses 1,284,313 1,808,308
Total current liabilities 2,954,111 8,012,678
Stockholders' equity:
Common stock, no par value; 25,000,000
shares authorized; 7,474,871 shares issued
and outstanding at June 30 and 7,446,842 at
December 31, 1997 25,190,579 25,170,267
Retained earnings 13,959,041 15,332,328
----------- -----------
Total stockholders' equity 39,149,620 40,502,595
----------- -----------
$42,103,731 $48,515,273
=========== ===========
See notes to consolidated financial statements
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ending June 30,
1998 1997
------- -------
Net sales $ 12,114,906 $ 12,037,134
Costs of goods sold 10,029,523 14,486,119
-------------- --------------
Gross profit (loss) 2,085,383 (2,448,985)
Operating expenses:
Selling 2,835,152 2,172,474
General and administrative 974,187 1,373,989
Research and development 1,059,660 1,197,368
-------------- --------------
Total operating expenses 4,868,999 4,743,831
-------------- --------------
Loss from operations (2,783,616) (7,192,816)
Other income, net 281,129 349,862
-------------- ---------------
Loss before income taxes (2,502,487) (6,842,954)
Income tax benefit (929,620) (2,530,848)
-------------- --------------
Net loss $ (1,572,867) $ (4,312,106)
============== ==============
Loss per common and common
equivalent share:
Basic $ (.21) $ (.58)
============== ==============
Diluted $ (.21) $ (.58)
============== ==============
Weighted average number of common
shares outstanding:
Basic 7,474,871 7,472,371
============== ==============
Diluted 7,474,871 7,472,371
============== ==============
See notes to consolidated financial statements
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Operations
(Unaudited)
Six Months Ending June 30,
1998 1997
------- -------
Net sales $ 30,873,609 $ 29,987,845
Costs of goods sold 23,587,341 29,178,319
-------------- --------------
Gross profit 7,286,268 809,526
Operating expenses:
Selling 5,679,177 4,987,366
General and administrative 2,240,244 2,430,255
Research and development 2,027,156 2,240,712
-------------- --------------
Total operating expenses 9,946,577 9,649,333
-------------- --------------
Loss from operations (2,660,309) (8,839,807)
Other income (expense), net 480,488 478,949
-------------- ---------------
Loss before income taxes (2,179,821) (8,360,858)
Income tax benefit (806,534) (3,092,472)
-------------- --------------
Net loss $ (1,373,287) $ (5,268,386)
============== ==============
Loss per common and common
equivalent share:
Basic $ (.18) $ (.71)
============== ==============
Diluted $ (.18) $ (.71)
============== ==============
Weighted average number of common
shares outstanding:
Basic 7,473,683 7,465,084
============== ==============
Diluted 7,473,683 7,465,084
============== ==============
See notes to consolidated financial statements
<PAGE>
ZOOM TELEPHONICS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ending June 30,
1998 1997
------ ------
Cash flows from operating activities:
Net loss $ (1,373,287) $ (5,268,386)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 498,913 437,068
Deferred income taxes (126,159) 1,319
Changes in assets and liabilities:
Accounts receivable 5,747,728 10,783,856
Inventories 2,171,700 5,851,026
Refundable income taxes 3,498,777 (2,225,096)
Prepaid expenses and other assets (10,486) 279,877
Accounts payable and accrued expenses (5,058,566) (5,309,145)
Tax benefit from exercise of
non-qualified stock options 809 78,675
Net cash provided by
operating activities 5,349,429 4,629,194
------------- -------------
Cash flows from investing activity:
Purchases of property, plant
and equipment (271,073) (417,522)
------------- --------------
Net cash used in
investing activity (271,073) (417,522)
-------------- --------------
Cash flows from financing activity:
Proceeds from exercise
of stock options 20,312 204,232
------------- -------------
Net cash provided by
financing activity 20,312 204,232
------------- -------------
Net increase in cash
and cash equivalents 5,098,668 4,415,904
Cash and cash equivalents,
beginning of period 11,281,337 9,172,186
------------- ------------
Cash and cash equivalents,
end of period $ 16,380,005 $ 13,588,090
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 0
============= =============
Income taxes 0 0
============= =============
See notes to consolidated financial statements
<PAGE>
ZOOM TELEPHONICS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements of Zoom Telephonics, Inc., (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ending
December 31, 1997 included in the Company's 1997 Annual Report on Form 10-K.
The consolidated balance sheet as of June 30, 1998, the consolidated
statements of operations for the three months and six months ending June 30,
1998 and 1997, and the consolidated statements of cash flows for the six months
ending June 30, 1998 and 1997 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal, recurring adjustments) necessary
for a fair presentation of results for these interim periods.
The results of operations for the six months ending June 30, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1998.
<PAGE>
(2) Earnings Per Share
The reconciliation of the loss numerators and denominators of the basic and
diluted net loss per common share computations for the Company's reported net
loss is as follows:
<TABLE>
<CAPTION>
Three months ending June 30, Six months ending June 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------------- ------------------- -------------------- ------------------
Basic:
Net loss $ (1,572,867) $ (4,312,106) $ (1,373,287) $ (5,268,386)
============= ============= ============= =============
Weighted average shares
outstanding 7,474,871 7,472,371 7,473,683 7,465,084
========= ========= ========= =========
Net loss per share
(.21) (.58) (.18) (.71)
===== ===== ===== =====
Diluted:
Net loss $ (1,572,867) $ (4,312,106) $ (1,373,287) $ (5,268,386)
============= ============= ============= =============
Weighted average shares
outstanding 7,474,871 7,472,371 7,473,683 7,465,084
Net effect of dilutive
stock options based on
the Treasurey stock - - - -
method using average
market price
Weighted average shares
outstanding 7,474,871 7,472,371 7,473,683 7,465,084
========= ========= ========= =========
Net loss per share
(.21) (.58) (.18) (.71)
===== ===== ===== =====
</TABLE>
<PAGE>
(3) Inventories
Inventories consist of the following: 6/30/98 12/31/97
Raw materials $5,589,481 $7,261,914
Work in process 1,890,649 2,542,260
Finished goods 2,382,518 2,230,175
-------------- -------------
$9,862,648 $12,034,349
============== =============
(4) Stock Options
Proceeds from the exercise of options granted under the Company's stock option
plans and income tax benefits attributable to stock options exercised are
credited to common stock. During the six months ending June 30, 1998, options
with respect to 2,500 shares were exercised and such exercises resulted in a tax
benefit to the Company of $809.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Zoom Telephonics, Inc. ("Zoom" or "the Company") recorded net sales
of $12,114,906 and a net loss of $1,572,867 for the Company's second quarter
ending June 30, 1998 compared to sales of $12,037,134 and a net loss of
$4,312,106 for the second quarter ending June 30, 1997. Earnings per share
improved to a loss of $0.21 for the second quarter of 1998 from a loss of $0.58
for the second quarter of 1997. Zoom's net sales for the six months ending June
30, 1998 were $30,873,609, with a net loss of $1,373,287 or $.18 per share,
versus net sales of $29,987,845 and a net loss of $5,268,386 or $.71 per share
for the six months ending June 30, 1997.
Net sales for the quarter ending June 30, 1998 increased $77,772 or 0.6%
from the second quarter of 1997. Net sales for the six months ending June 30,
1998 increased $885,764 or 3.0% from the first six months of 1997. The Company
began introducing its V.90 standard 56K modems in February 1998, which
contributed to increased total unit sales for the second quarter and for the
first six months of 1998 compared to the second quarter and first six months of
1997, but was also responsible for price reductions and higher product returns
for both pre-standard 56K and 33.6K modems.
Gross margin increased to 17.2% in the second quarter of 1998 from a
negative 20.3% in the second quarter of 1997. This increase reflected generally
higher margins of 56K modems compared to the 33.6K modems sold in the prior
year, reduced inventory obsolescence, and lower channel inventory price
protection. Inventory obsolescence cost was $300,300 in the second quarter of
1998 compared to $1,430,555 in the second quarter of 1997. Channel inventory
price protection was $922,194 in the second quarter of 1998 compared to
$1,625,272 in the second quarter of 1997. Gross margin increased to 23.6% in the
first six months of 1998 from 2.7% in the first six months of 1997. The major
contributors to the six month improvement were the same as those stated for the
second quarter improvement. Inventory obsolescence cost was $850,300 in the
first six months of 1998 compared to $1,730,555 in the first six months of 1997.
Channel inventory price protection was $1,415,186 in the first six months of
1998 compared to $2,412,523 in the first six months of 1997.
Selling expenses during the second quarter of 1998 increased 30.5% to
$2,835,152 or 23.4% of net sales from $2,172,474 or 18.0% of net sales in the
second quarter of 1997. Selling expenses during the first six months of 1998
increased 14.1% to $5,679,177 or 18.4% of net sales from $4,978,365 or 16.6% of
net sales in the first six months of 1997. The increase was primarily the result
of increased advertising expenses, primarily in the form of cooperative
advertising programs with resellers of Zoom modems.
General and administrative expenses were $974,187 or 8.0% of net sales
during the second quarter of 1998 compared to $1,373,989 or 11.4% of net sales
in the second quarter of 1997. General and administrative expenses were
$2,240,244 or 7.3% of net sales during the first six months of 1998 compared to
$2,430,255 or 8.1% of net sales in the first six months of 1997. The decrease
for both periods was primarily due to reduced expenses for personnel and bad
debts.
Research and development expenses decreased 11.5% to $1,059,660 or 8.7% of
net sales during the second quarter of 1998 from $1,197,368 or 9.9% of net sales
in the second quarter of 1997. Research and development expenses decreased 9.5%
to $2,027,156 or 6.6% of net sales during the first six months of 1998 from
$2,240,712 or 7.5% of net sales in the first six months of 1997. The decrease
was primarily due to higher expenses in 1997 for government approvals.
<PAGE>
The Company experienced a net loss of $1,572,867 during the second quarter of
1998 compared to a net loss of $4,312,106 in the second quarter of 1997. For the
six month period of 1998 the Company lost $1,373,287 compared to a net loss of
$5,268,386 in the first six months of 1997. The improvement for both periods was
predominantly due to improved gross profit for reasons noted above.
Liquidity and Capital Resources
Zoom ended the second quarter of 1998 with a strong balance sheet,
with net book value of $39,149,620 or $5.24 per share, and cash and cash
equivalents of $16,380,005. The current ratio improved during the first six
months of 1998 to 12.5 from 5.4. Working capital at the end of the second
quarter of 1998 was $33,946,534 compared to $35,063,562 at December 31, 1997.
The Company has available a $5,000,000 secured line of credit which expires
September 30, 1998, and is currently in discussion for renewal. No significant
amounts were outstanding under this line of credit as of June 30, 1998.
Operating activities provided $5,349,429 in cash during the first six
months of 1998. Cash was provided by the reduction of accounts receivable by
$5,747,728, the decline of refundable income taxes of $3,498,777, and the
reduction of inventories by $2,171,700. The decline in accounts receivable and
inventory was due primarily to seasonal sales volume changes. The reduction of
refundable income taxes resulted from the receipt by the Company of its 1997
federal tax refund. These sources of cash were partially offset by the net loss
of $1,373,287 and the reduction of accounts payable and other accrued expenses
of $5,058,566.
Zoom's capital expenditures during the first six months of 1998 were
$271,073, primarily for computer equipment. Although the Company does not have
any significant capital commitments, it anticipates that it will continue with
modest investments in equipment and facilities improvements during the year.
During the first six months of 1998, financing activities provided the
Company with $20,312 of cash proceeds from the exercise of employee stock
options.
The Company believes that its existing cash, together with funds
generated from operations and available sources of financing, will be sufficient
to meet normal working capital requirements.
<PAGE>
New Accounting Pronouncements
In December 1997, the Company adopted the Financial Accounting
Standards Board Statement No. 128, "Earnings per Share." (SFAS 128). All
previously reported net income (loss) per share data have been restated to
conform to the provisions of SFAS 128. Under SFAS 128, basic net income (loss)
per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares for the period.
Diluted net income (loss) per share reflect the maximum dilution that would have
resulted from the assumed exercise and share repurchase related to dilutive
stock options and are computed by dividing net income (loss) by the weighted
average number of common shares and all dilutive securities outstanding.
In June 1997, the Financial Accounting Standards Board issued Statement
130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in income,
regardless of whether they are considered to be the results of operations of the
period. The Company adopted SFAS 130 in March 1998 and it did not have a
material impact on the consolidated financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement
131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131, which
becomes effective for the Company in its year ending December 31, 1998, is
currently not expected to have a material impact on the Company's consolidated
financial statements and disclosures as the Company does not have multiple
reportable operating segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which establishes
guidelines for the costs of all computer software developed or obtained for
internal use. SOP 98-1 is effective for the Company in 1999, and is not expected
to have a material impact on the Company's financial statements.
Year 2000 Date Conversion
The Company has implemented a comprehensive Enterprise Resource
Planning System which is fully year 2000 date compliant. The Company is in the
process of implementing new systems for all remaining non mission critical
computer systems. All major conversions are complete and the implementation
schedule for minor systems anticipates a complete conversion prior to January 1,
2000. The Company presently believes that, with the completed conversions and
anticipated conversions to new software, the year 2000 problem will not pose a
significant operational problem to the Company. However, there can be no
assurance that the systems of other parties upon which the Company's business
also relies, including but not limited to the Company's customers and suppliers,
will be converted on a timely basis. The Company's business, financial
condition, or results of operations could be materially adversely affected by
the failure of its systems or those of other parties to operate or properly
manage dates beyond 1999.
<PAGE>
Other
A portion of the Company's revenues are subject to the risks associated
with international sales. Although most of the Company's product prices are
denominated in the United States currency, customers in foreign countries
generally evaluate purchases of products such as those sold by the Company on
the purchase price expressed in the customer's currency. Therefore, changes in
foreign currency exchange rates may adversely affect the demand for the
Company's products.
For a number or years Zoom has purchased modem chipsets from a single
supplier, Rockwell. Zoom recently decided to also purchase chipsets from Lucent
Technologies, with a goal of maintaining good supply relationships with both
Rockwell and Lucent. This approach has potential strategic and tactical
advantages, but also has risks including the likelihood of degrading Zoom's
business relationship with Rockwell, the risk of poor execution of the
transition of some products to Lucent, and other risks associated with using a
new supplier and new product designs for modems that represent a significant
percentage of Zoom's revenues.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
Forward-looking statements in this report, including without limitation
statements relating to the adequacy of the Company's resources are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that such forward-looking statements involve risks
and uncertainties, including without limitation: overall product demand for 56K
modems or the Company's V.90 standard 56K or K56flex(TM) modems, the renewal of
the Company's line of credit, potential quarterly fluctuations in the Company's
operating results, seasonality of sales, rapid technological change,
competition, the concentration of the Company's customers, the Company's
dependence upon a limited number of principal suppliers for its modem chipsets
and on third-party assemblers, risks associated with inventory management, risk
of product returns and price-protection, sales channel risks, risks associated
with international sales, the ability of the Company to manage its growth, the
Company's reliance on key employees, risks associated with proprietary
technology, and other risks and uncertainties indicated from time to time in the
Company's filings with the Securities and Exchange Commission.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
No material developments
ITEM 4 - Submission of Matters to a Vote of Security Holders
Zoom held its Annual Meeting of Shareholders on June 24, 1998. At the
meeting, the shareholders approved (a) the re-election of the Board of Directors
of Zoom Telephonics, Inc., (b) to amend the 1990 Stock Option Plan and (c) the
appointment of KPMG Peat Marwick LLP as Zoom's independent auditors for the year
ending December 31, 1998.
(a) Election of Directors:
Nominee For Against Abstain
- -------- --- ------- -------
Frank B. Manning 7,069,345 0 128,525
Peter R. Kramer 7,069,546 0 128,324
Bernard Furman 7,028,046 0 129,774
J. Ronald Woods 7,062,846 0 130,724
L. Lamont Gordon 7,068,546 0 129,324
(b) Approval to amend the ZOOM Telephonics, Inc. Stock Option Plan to
increase the number of shares reserved for issuance thereunder, and to extend
the expiration date of the Plan from March 31, 2000 to March 31, 2008:
For Against Abstain
--- ------- --------
Approval 2,707,796 327,258 135,990
(c) Approval of the appointment of KPMG Peat Marwick LLP as independent
auditors for the year ending December 31, 1998:
For Against Abstain
--- ------- -------
Approval 7,091,045 59,490 38,145
<PAGE>
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibit Description Page
-------- ----------- ----
10.1 1990 Stock Option Plan, as amended
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
quarter ending June 30, 1998
<PAGE>
ZOOM TELEPHONICS, INC.
FINANCIAL INFORMATION NOT AUDITED
The preceding financial information, with the exception of the consolidated
balance sheet at December 31, 1997, has not been audited. However, in the
opinion of management, all material adjustments, consisting only of normal
recurring accruals necessary to present a fair statement of the results for
these periods, have been reflected. The results for these periods are not
necessarily indicative of the results for the full fiscal year.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TELEPHONICS, INC.
Date: August 14, 1998 By: /s/ Frank Manning
---------------------------------------
Frank B. Manning, President
Date: August 14, 1998 By: /s/ Robert A. Crist
---------------------------------------
Robert A. Crist, Vice President
of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
ZOOM TELEPHONICS, INC.
STOCK OPTION PLAN
As Amended Through August 4, 1998
PART I
INTRODUCTION
1. Purpose.
The purpose of this Stock Option Plan (the "Plan") is to establish a
plan to advance the interests of Zoom Telephonics, Inc. (the "Company") by
encouraging equity participation in the Company by directors, officers and
certain full-time and part- time employees of the Company or an affiliate of the
Company through acquisition of common shares without par value in the Company.
Notwithstanding the foregoing, a non-employee director of the Company shall not
be entitled to participate under the Plan.
2. Definitions.
In the Plan,
(i) "Board" means the board of directors of the Company;
(ii) "Employee" means any individual or individuals in the
full-time or part-time employment of the Company or an
affiliate and includes Board members, consultants and any
other individuals the Board deems to be an employee for
the purpose of the Plan, except that a Board member who
is not otherwise employed by or serving as an officer of
the Company shall not be considered an Employee;
(iii) "Option Price" means the price per Share at which shares
may be purchased upon the exercise of an Option;
(iv) "Optionee" means a person who is eligible to receive
Options and who does so;
(v) "Option" means the option rights granted by the Company
in accordance with the provisions of the Plan;
(vi) "Shares" means shares to be optioned under the Plan and
are common shares without par value in the capital of the
Company as constituted on the date the shareholders of
the Company approve the Plan;
(vii) "Stock Option Committee" means a committee designated by
the Board, consisting of at least two Board members who
are not eligible for grants of Options under the Plan;
(viii) "Tax Date" means the date on which the amount of tax to
be withheld with respect to the exercise of an Option is
determined; and
(ix) "Termination" means termination of the employment of
an Employee.
<PAGE>
3. Administration of the Plan
The Plan shall be administered by the Stock Option Committee.
The Stock Option Committee is authorized, subject to the provisions of
the Plan, to adopt such rules and regulations which it deems consistent with the
Plan's provisions and, in its sole discretion, to designate Options to purchase
Shares pursuant to the Plan. The determinations of the Stock Option Committee
and interpretations shall be final and conclusive regarding the administration
of the Plan.
The Stock Option Committee may authorize one or more Employees of the
Company to execute, deliver and receive documents on behalf of the Stock Option
Committee with regard to the Plan.
<PAGE>
PART II
STOCK OPTIONS
4. Eligibility
All Employees are eligible to receive Options.
Nothing in the Plan shall confer any right on any Employee to continue
in the employ of or association with the Company or any affiliate of the Company
or shall interfere in any way with the right of the Company or any affiliate of
the Company to terminate at any time the employment of an Optionee under the
Plan.
5. Shares Subject to Option
The Shares to be optioned under the Plan shall be authorized but
unissued.
The aggregate number of Shares for which Options may be granted shall
not exceed 2,800,000 common shares, but in no event shall the aggregate number
of Shares under the Plan that may be subject, from time to time, to outstanding
options granted to any one Employee exceed 5% of the Shares of the Company then
outstanding.
6. Granting of Options
The Stock Option Committee may from time to time at its discretion,
subject to the provisions of the Plan, determine those eligible Employees to
whom Options shall be granted, the number of Shares subject to such Options, the
dates on which such Options are to be granted, and the price and term of such
Options as set forth below.
Each Option shall be evidenced by a written agreement between, and
executed by, the Company and the Optionee containing terms and conditions
established by the Stock Option Committee with respect to such Option and shall
be consistent with the provisions of the Plan. The Option shall include the
following, or a similar statement: "This Option is not intended to be an
incentive stock option as that term is described in 422 of the Code, as
amended."
7. Option Price
The Option Price shall be not less than the fair market value of the
common shares without par value in the capital of the Company on the date of the
grant of Option, as determined by reference to the closing price per share for
such common shares as reported on the Nasdaq National Market on the date of the
grant or, if such common shares are not listed on the Nasdaq National Market,
then on such other stock exchange or market quotation system where such shares
may from time to time be listed or traded on the date of the grant, subject to
any applicable regulatory rules.
8. Terms of Options
The Stock Option Committee may, in its entire discretion, at the time
of the granting of an Option under the Plan, specify a particular time period or
periods following the date of the grant of an Option during which an Optionee
may exercise his Option and may designate the number of Shares in respect of
which such Optionee may exercise his Option during each such time period.
Notwithstanding the foregoing, in no event shall an Option granted under the
Plan be exercisable within six months of the date of grant of such Option.
Each Option, unless sooner terminated, shall expire on a date to be
determined by the Stock Option Committee which will not be later than 10 years
from the date the Option was granted.
9. Exercise of Options
An Optionee shall exercise an Option (or any part or installment
thereof) by giving written notice to the Company at its principal office
address, identifying the Option being exercised, specifying the number of Shares
as to which such Option is being exercised and accompanied by full payment of
the Option Price therefor either (1) in US dollars, in cash or by certified
cheque or bank draft, or (2) in common shares without par value in the capital
of the Company owned by the Optionee (and held at least one year if acquired
pursuant to the exercise of any stock option granted by the Company to the
Optionee whether under the Plan or otherwise) having a fair market value (as
determined by the Stock Option Committee as of the day immediately preceding the
date on which the Option is exercised and in accordance with all applicable laws
and all applicable rules and policies of relevant securities regulatory
authorities) equal to, or a fraction of a share less than, such purchase price
(and if such common shares are equal to a fraction of a share less than such
purchase price, then the Optionee shall pay any balance remaining in cash), or
(3) in a combination of such common shares (as described above) and cash,
certified cheque or bank draft. However, if the Optionee desires to tender
common shares in payment of any part of the Option Price as contemplated in (2)
or (3) above, the Optionee, before giving notice of exercise as aforesaid, shall
first give written notice (addressed to the principal office of the Company
specifying the number of shares which the Optionee wishes to tender) that the
Optionee proposes to tender common shares in order to exercise his Option. The
Stock Option Committee shall notify the Optionee whether the proposed tender is
acceptable to the Stock Option Committee within ten days of receipt of notice of
the proposed tender. The acceptance of any tender of common shares by an
Optionee pursuant to (2) or (3) in payment of the Option Price shall be subject
to the absolute discretion of the Stock Option Committee, who may only accept
the tender of such common shares in accordance with, and subject to the
requirements of, all applicable laws and all applicable rules and policies of
relevant securities regulatory authorities. If the proposed tender is
acceptable, the Optionee must then give written notice of the exercise of his
Option as aforesaid within five days or receipt of notice of the Stock Option
Committee that the proposed tender is acceptable. If the proposed tender is not
acceptable and the Optionee, at that time, still desires to exercise his Option,
he may do so by giving written notice of exercise of his Option as aforesaid and
paying the Option Price in cash or by certified cheque or bank draft. The
acceptance by the Company of common shares tendered in payment of the Option
Price shall be treated as a purchase of those shares by the Company.
Unless the Stock Option Committee otherwise determines, the holder of
an Option shall have no rights as a shareholder with respect to the Shares
issued upon exercise of the Option until the date of issuance of the certificate
for those shares to him. Unless the Stock Option Committee otherwise determines,
no adjustment will be made for dividends or similar rights for which the record
date occurs after the exercise of the Option but before the date such
certificate for Shares is issued. In no case may a fraction of a Share be
purchased or issued under the Plan.
<PAGE>
PART III
WITHHOLDING TAXES
10. Withholding Taxes
Each Optionee's rights under the Plan are subject to such Optionee's
payment to the Company of the amount of taxes (if any) required by any
government to be withheld by reason of any exercise of an Option by the
Optionee. Such amount may be paid at the election of the Optionee (1) in US
dollars, in cash or by certified cheque or bank draft, (2) subject as set out
below, in common shares without par value in the capital of the Company owned by
the Optionee having a fair market value (determined as set out below) equal to
the amount of such withholding (and held at least one year if such shares were
acquired by exercise of any stock option granted to the Optionee under this Plan
or otherwise granted), (3) subject as set out below, by directing the Company,
for its own account, to withhold, from the Shares issued to the Optionee upon
the exercise of the Option, a number of such Shares having a fair market value
(determined as set out below) equal to the amount of such withholding, or (4)
subject as set out below, in any combination of the foregoing.
The number of shares to be surrendered or withheld shall be based on
the fair market value of such shares on the Tax Date, and shall be determined by
the Stock Option Committee in accordance with all applicable laws and all
applicable rules and policies of relevant securities regulatory authorities. Any
fractional share amount remaining after satisfaction of the withholding
requirement shall be paid to the Optionee in cash.
Any election hereunder must be made before the Tax Date and shall be
irrevocable. The Stock Option Committee may disapprove any such election.
Approval of an election involving payment of the withholding tax in common
shares without par value in the capital of the Company is in the absolute
discretion of the Stock Option Committee, and may only be made in accordance
with, and subject to, the requirements of all applicable laws and all applicable
rules and policies of relevant securities regulatory authorities. Such an
election shall be treated as a proposed purchase of those shares by the Company.
If the Optionee is subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, at the time of an election, such Optionee's election
shall be subject to the following additional restrictions:
(a) No election shall be effective for a Tax Date which
occurs within six months of the grant of the Option,
except that this limitation shall not apply if the
Optionee dies or is disabled before the six-month period
expires.
(b) The election must be made either six months before the
Tax Date or during a period beginning on the third
business day following the date of release for
publication of the Company's quarterly or annual income
statements and ending on the twelfth business day
following such date.
<PAGE>
PART IV
DEALING WITH THE OPTIONS
11. Transferability of Options
An Option may not be transferred. During the lifetime of an Optionee,
the Option may be exercised only by the Optionee.
12. Termination of Employment
Upon termination for any reason except death or permanent disability,
an Optionee may, at any time within one month after the date of Termination but
not later than the date of expiration of the Option, exercise the Option to the
extent the Optionee was entitled to do so on the date of Termination. Any Option
or portions of Options of terminated Employees not so exercised shall terminate.
A change of employment shall not be considered a Termination so long as the
Optionee continues to be employed by the Company or an affiliate of the Company.
13. Death or Permanent Disability
Notwithstanding any other provisions of the Plan, if any Optionee shall
die or become permanently disabled while holding an Option which has not been
fully exercised or surrendered, his personal representatives, heirs or legatees
may, at any time within 60 days of grant of probate of the will or letters of
administration of the estate of the decedent or within one year after the date
of such death or permanent disability, whichever is the lesser time,
(notwithstanding the normal expiry date of the Option under the provisions of
Section 8) exercise the Option with respect to the unexercised balance of the
Shares subject to the Option. The occurrence of permanent disability shall be
determined by the Stock Option Committee on the basis of available medical
evidence.
14. Changes in Shares
In the event the authorized capital of the Company as presently
constituted is consolidated into a lesser number of Shares or subdivided into a
greater number of Shares, the number of Shares for which the Options are
outstanding shall be decreased or increased proportionately as the case may be,
and the Option Price shall be adjusted accordingly. Should the Company
amalgamate or merge with any other company or companies (the right to do so
being hereby expressly reserved) whether by way of arrangement, sale of assets
and undertakings or otherwise, then and in each such case the number of shares
of the resulting company to which an Option relates shall be determined as if
the Option had been fully exercised prior to the effective date of the
amalgamation or merger and the Option Price shall be correspondingly increased
or decreased as applicable.
15. Cancellation and Regrant of Options
The Stock Option Committee may cancel an existing Option and regrant
the Option at an Option Price determined in the same manner as provided in
Section 7 above.
16. Availability of Cancelled Shares
In the event any Option granted under the Plan shall expire, terminate
or be cancelled for any reason without having been exercised in full, or shall
cease for any reason to be exercisable in whole or in part, the unpurchased
shares subject thereto, to the extent the Option ceases to be exercisable, shall
again be available under the Plan.
17. Term of the Plan
The Plan shall expire on March 31, 2008 unless terminated earlier by
resolution of the Shareholders of the Company.
<PAGE>
PART V
REPURCHASE
18. Repurchase of Shares from Employees
Subject to the Articles of the Company, any special rights and
restrictions attached to any class of shares of the Company, any applicable
laws, and any applicable rules and policies of any stock exchange or market
quotation system on which any shares of the Company may be listed from time to
time, the Company may, by a resolution of the Stock Option Committee, purchase
shares of the Company from Employees, whether such shares were acquired by an
Employee upon exercise of an Option or otherwise, at the price and upon the
terms specified in such resolution.
PART VI
GENERAL
19. Amendment or Discontinuance
The Stock Option Committee may amend, alter, suspend or discontinue the
Plan, but may not, without the approval of the shareholders of the Company, make
any alteration that would materially increase the benefits to participants under
the Plan, within the meaning of Rule 16b-3 promulgated under the United States
Securities Exchange Act of 1934 (or any successor or supplementary law, rule or
regulation), including without limitation, and alteration that would:
(a) increase the aggregate number of Shares subject to Option
under the Plan, except as provided in Section 14;
(b) decrease Option Prices, except as provided in Section 14;
(c) alter the eligibility provisions of the Plan; or
(d) change the expiry date of the Plan.
The Stock Option Committee may, at any time, in its discretion amend
the Plan in order to bring it into compliance with the rules and policies of the
Nasdaq National Market or of any other applicable securities regulatory
authorities.
20. Interpretation
The Plan is established under the laws of the Province of British
Columbia and the rights of all parties and the construction and effect of each
and every provision of the Plan shall be according to the laws of the Province
of British Columbia.
Throughout this Plan, wherever the singular or masculine are used the
same shall be construed as being the plural or feminine or neuter where the
context so requires.
21. Liability
No member of the Stock Option Committee or any employee of the Company
shall be personally liable for any act taken or omitted in good faith in
connection with the Plan.
22. Administration Costs
All costs and expenses of administering the Plan shall be paid for by
the Company.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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