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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-22804
ACTIVE VOICE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1235111
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 441-4700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the 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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K / /.
The aggregate market value of the Common Stock held by
non-affiliates of the registrant, based on the closing price on June
14, 1996, as reported by the Nasdaq Stock Market was $42,008,239. (1)
The number of shares of the registrant's Common Stock outstanding as
of June 14, 1996, was 4,573,028.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the
registrant's 1996 Annual Meeting of Stockholders to be held on August 30,
1996, are incorporated by reference into Part III of this Report.
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(1) Excludes shares held of record on that date by directors and officers of the
registrant. Exclusion of such shares should not be construed to indicate that
any such person directly or indirectly possesses the power to direct or cause
the direction of the management of the policies of the registrant.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Industry Background . . . . . . . . . . . . . . . . . . . . . . 1
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Product Technology . . . . . . . . . . . . . . . . . . . . . . . 6
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . 7
Product Development . . . . . . . . . . . . . . . . . . . . . . 10
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . 10
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Proprietary Rights . . . . . . . . . . . . . . . . . . . . . . . 11
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 14
Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . . 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 37
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 38
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and Management . 38
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 39
<PAGE>
PART I.
ITEM 1. BUSINESS
Active Voice Corporation (Active Voice or the Company) is a leading
provider of PC-based voice processing systems and computer telephone
integration (CTI) products. The Company's software products enable small- to
medium-sized businesses and offices to communicate more effectively by
integrating their traditional office telephone systems with their local area
network (LAN) and desktop PCs and with message servers providing voice mail,
automated attendant, interactive voice response, fax mail, and desktop
PC-based call handling.
Active Voice products are designed to be "people-oriented," with
features that can be readily used without special training or manuals. The
Company's principal products, Repartee, Replay Plus and Replay, incorporate
Active Voice's "1 for yes, 2 for no" user dialogue. The Company's products
use standard, open-architecture PC platforms and operating systems, thereby
facilitating the rapid adoption of new PC-based technologies and reducing
overall product costs. The Company concentrates its development efforts on
software rather than hardware because it believes product value is created most
efficiently by emphasizing software solutions to meet customer needs. During
fiscal 1995, the Company introduced TeLANophy, a set of new CTI products that
offer a subscriber on one of the Company's Repartee systems: (1) the ability
to use a desktop PC on a LAN for real-time control of multiple incoming
and outgoing calls with the drag and drop features of Microsoft Windows, (2)
graphical management of voice mail and facsimile messages, and (3) the ability
to listen and respond to e-mail remotely.
Founded in 1983, the Company was one of the pioneers of PC-based
voice processing. Its initial products were based upon technological
approaches identified at Massachusetts Institute of Technology's Media
Laboratory for Speech and Artificial Intelligence. A central business purpose
of the Company is developing software that empowers people to communicate using
telephones, PCs, the LAN, and the Internet, four of the most fundamental
business tools.
INDUSTRY BACKGROUND
The voice processing industry, like the computer industry, had its
origins in large proprietary systems and has grown to include smaller, more
open systems. Early voice processing systems were based on proprietary
technology, which often could be used only in conjunction with a single type
of private branch exchange (PBX) switch. These systems were designed for
use by large corporations and typically cost several hundred thousand
dollars. By the early 1980s, new market entrants began to develop systems
that were somewhat more affordable, often costing $100,000 or more,
but were still based on proprietary hardware and operating system
architectures. As the processing power of PCs increased and disk storage,
microprocessor and other microcomputer component costs fell, PCs also
became a viable platform for voice processing applications. PC-based
products, utilizing standard, open-architecture platforms and operating
systems, now offer small- to medium-sized businesses and offices the
benefits of many of the same features currently found in large proprietary
systems, but at substantially lower price points ranging from about $3,800 to
$150,000.
According to industry statistics, the domestic market for voice
processing systems comprises more than 35 manufacturers, whose voice
messaging products accounted for aggregate end-user revenues of
approximately $1.9 billion in 1995, compared with about $989
million in 1991. Manufacturers of voice messaging systems include switch
suppliers (such as AT&T, Northern Telecom, Inc. and Rolm Co.); independent
manufacturers of proprietary systems (such as Centigram Communications
Corporation and Octel Communications Corporation); and independent
manufacturers of PC-based, open-architecture systems (such as Active
Voice, Applied Voice Technologies, Inc., Compass Technology, Inc., and
Microlog Corporation). Although sales of the Company's products in 1995
represented only about 5.5% of domestic end-user revenues for voice
messaging systems, the Company ranked third behind only AT&T and
Northern Telecom in total domestic voice
messaging systems shipped, according to industry
statistics. (References in this paragraph, as
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well as elsewhere in this Report, to industry statistics concerning sales
and shipments by the Company and its competitors are based on estimates
compiled relative to the U.S. market by Dataquest Corporation, an
independent research firm specializing in high technology.)
Until recently, voice processing systems had not been widely accepted
in most foreign countries, due to various factors such
as less advanced communications infrastructures, cultural differences and
regulatory requirements. The Company, however, believes that the current
markets in Australia, Japan and much of Western Europe exhibit
characteristics similar to the U.S. voice processing market in the
mid-1980s. In these regions, a few large organizations have installed
voice processing systems, and product inquiries by potential customers and
distributors are increasing. While the Company believes that small- to
medium-sized enterprises in most developed countries have the same needs
for improved telephone communications as in the United States, it is
difficult to predict the rate and extent of future development of demand for
voice processing products in these markets. Although there
are several foreign manufacturers of PC-based and proprietary voice
processing systems, foreign markets are generally not yet as
competitive as the U.S. market.
Voice processing has traditionally encompassed various types of
computer assistance to facilitate interaction over the telephone between a
caller, one or more persons and a computer. With voice processing
technology, telephone users can utilize voice and touch tones to manipulate
calls, interact with computer databases, and access and respond to
messages or data from voice or other electronic media, thereby making
internal and external communications more efficient. The three most common
voice processing features are:
VOICE MAIL -- allows a caller to store voice messages and replies in
a computer, and thereby conduct a dialogue with any person, potentially
anywhere in the world, without having to be on the same line at the same
time. Typical voice mail features include the ability to record, store and
delete messages, and to direct messages to multiple subscribers.
AUTOMATED ATTENDANT -- allows a caller to direct the computer to switch
the call to a telephone extension different from the one dialed, without
the manual intervention of an operator. A typical automated attendant
system gives the caller the option of directing the call to the extension
number of a particular telephone user in the system ("subscriber") or of a
particular department, or holding for a live operator.
INTERACTIVE VOICE RESPONSE (IVR) -- allows a caller to obtain requested
information in voice form from a local or nonlocal database. Examples of IVR
range from simply selecting announcements from a list of options stored
in the computer (also known as AUDIOTEXT) to more complex interactive
exchanges such as querying a database for information.
These basic voice processing functions offer people integrated and
simplified access to various types of communications and information through
the traditional telephone system. Over the past decade, there has been a
proliferation of new methods of business communication, such as facsimile
(fax) and electronic mail (e-mail). At the same time, it has become easier
to access communications through pagers, cellular phones and portable
computers with communications capability. As a result, voice
processing systems can now access and interact with a broad variety of
communications sources offering unified messaging. For example,
text-to-speech and other voice processing technologies permit a subscriber
to hear or send e-mail through touch tones or voice recognition. In
addition, today the telecommunications industry is delivering a wide array
of CTI products. CTI merges data networks and telephones, dramatically
increasing connectivity among the various means of electronic communication
and improving the way people communicate and the way they work. Integration
of telephone based communications with the LAN (also known as the Intranet)
and the Internet are now allowing people to manage their telephone no matter
where they are.
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STRATEGY
The Company's strategy is to develop friendly, easy-to-use, PC-based
voice processing systems and CTI products that offer integrated access to a
broad range of communications with other people and information sources. The
Company's strategy is built around five basic elements:
- - EMPHASIZE SOFTWARE, NOT HARDWARE. The Company concentrates its
development efforts on software rather than on the design or
modification of hardware. The Company believes product value is
created most efficiently by emphasizing software solutions
to meet customer needs.
- - USE STANDARD, OPEN SYSTEMS AND HARDWARE. The Company's products use
standard, open-architecture PC platforms and operating
systems rather than proprietary computer hardware and operating
systems. As a result, the Company can rapidly adopt new
PC-based technologies and thereby leverage the substantial
expenditures made by third parties who develop new technologies
for the general PC environment. The use of commonly available
hardware components and software minimizes the Company's
manufacturing activity and helps reduce the overall cost of its
products.
- - FOCUS ON SMALL- TO MEDIUM-SIZED OFFICES. The Company's products are
designed for use by small- to medium-sized businesses
and offices in a wide range of enterprises, including
manufacturing, retail, service, health-care, governmental and
institutional settings. Since 1986, the Company's products have
offered many of the features commonly available in large,
proprietary voice processing systems, at price points more affordable
to this target market.
- - MAKE PRODUCTS EASY TO USE, INSTALL AND MODIFY. The Company
strives to maximize ease of use for each subscriber, for the
system manager and for the installer. The Company's products are
designed to be "people-oriented," with features that can be
used readily without special training or manuals. For example, a new
user need only know the Company's "1 for yes, 2 for no"
user dialogue to begin immediate use of all features. Other examples
of this product philosophy are the Company's voice mail
prompts that encourage conversation between callers and
subscribers, and its simplified installation screens and menus,
which allow automatic configuration to over 100 different PBX, key
system and Centrex switches and enable the system manager
to tailor features to subscriber needs.
- - MINIMIZE DISTRIBUTION OVERHEAD. The Company achieves broad market
coverage for its products domestically, without the use
of a direct sales force, primarily through a nationwide network of
over 700 independent telephone system dealers, and
through original equipment manufacturers (OEMs). A similar
distribution strategy is being pursued by the Company in foreign
markets. This distribution structure enables the Company to
limitreduce its selling expense overhead, focus its resources on
product development, leverage its sales efforts, and achieve
exposure to the substantial installed customer bases of these
organizations.
PRODUCTS
The Company has three principal products. Its first product,
Repartee, which was introduced in 1986, accounted for approximately 25% of
the Company's revenues in fiscal 1996. In 1991, the Company introduced its
most affordable product, Replay, to segment its target market and appeal to
more price-sensitive, smaller enterprises. Replay accounted for
approximately 15% of the Company's fiscal 1996 revenues. This was followed in
1992 by the introduction of Replay Plus, which was positioned between
Repartee and Replay in terms of price point, features and capacity. Replay
Plus accounted for approximately 40% of the Company's revenues in fiscal
1996. All of these products offer voice mail, automated attendant, audiotext
and fax mail features, and require the assistance of a dealer or other
trained installer to configure them to the end-user's telephone switch and
set up initial greetings, schedules and other subscriber features.
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The remaining 20% of the Company's fiscal 1996 revenues was comprised of
TeLANophy software, vertical market applications, switch integrations, fax
products, replacement hardware and other miscellaneous items.
REPARTEE -- offers the largest call handling capacity of the
Company's products, plus additional features such as fax detect and transfer,
fax mail (the ability to verbally annotate, collect and store faxes),
fax-on-demand (the ability to request that a certain fax be sent to the
caller), call screening, multi-office networking and easy message access.
The Company's CTI products integrate exclusively with Repartee. Repartee
includes a computer screen and keyboard that the installer or system manager
can utilize to tailor features to subscriber needs.
The Company's newly released Large System Platform (LSP) adds
enhanced computing power to Repartee. With up to 60 ports of capacity for
an unlimited number of subscribers, the Large System Platform is advantageous
for larger customers.
REPLAY PLUS -- a mid-priced product that offers most of the features
available on Repartee. Replay Plus is the current platform for the Company's
Hospitality package. Replay Plus also includes a computer screen and keyboard
for tailoring features to subscriber needs.
REPLAY -- a simple "plug and play" voice processing product intended
for small office settings. Its features are correspondingly reduced, which makes
configuration and installation much simpler. Replay does not require a computer
screen or keyboard, and most of the installation is performed by the
end-user. Replay can be integrated with many telephone switches commonly found
in small office settings.
Certain performance and other characteristics of the Company's
principal products are set forth in the following table:
<TABLE>
<CAPTION>
CURRENT MAXIMUM NUMBER OF HOURS OF TYPICAL RETAIL
PRODUCT VERSION SUBSCRIBERS (1) PORTS (2) MESSAGE STORAGE PRICE RANGE (3)
- ------- ------- -------------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Repartee . . . . 7.4 8,000 4 to 60 14 to 500 $12,000-$150,000
Replay Plus . . . 6.6 1,000 2 to 16 18 to 45 $ 7,300-$ 18,000
Replay . . . . . 2.5 100 2 to 6 18 $ 3,500-$ 5,800
(1) Based on the Company's current suggested usage assumptions. The
number of subscribers actually supported may be more or less
depending upon specific customer usage. The Company's products can be
upgraded on site, by increasing the number of ports and disk
drive capacity, to accommodate more subscribers up to the limits shown.
(2) Ports are physical connections of the product to telephone lines.
The number of ports determines the maximum number of telephone calls that
can be managed simultaneously by the voice processing system.
(3) Ranges shown are the Company's estimates based on its observations
of prices commonly quoted by members of its dealer network, exclusive of
maintenance. Prices vary depending upon the size and features of the system
purchased. Additional charges may be added for certain switch integrations.
</TABLE>
TELANOPHY -- A suite of CTI products that include client software
installed at the desktop PC and a voice processing server attached to the
LAN. Together, they offer Repartee subscribers: (1) the ability to use a
desktop PC on a LAN for real-time control of multiple incoming and outgoing
calls with the drag and drop feature of Microsoft Windows, (2) graphical
management of voice mail and facsimile messages, and (3) the ability to
listen and respond to e-mail remotely. TeLANophy allows the user to
utilize the mouse and keyboard
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to perform all the functions normally done on the telephone keypad.
ViewCall, ViewMail, ViewFax, E-Mail Integration, and the
recently released ViewCall Plus are modules of TeLANophy.
- - VIEWCALL -- ViewCall is a call control module for TeLANophy. With
ViewCall the user can see incoming calls on the PC screen and manage
multiple calls as they arrive. When Repartee routes a call to an
extension, ViewCall instantly displays information about the call on the
desktop. ViewCall alerts subscribers with visual and audio cues and opens
the call window. Users have the power to take the call, ask the caller to
hold, take a message or transfer calls to a different extension. ViewCall's
monitor feature allows the user to listen to a voice message as it is being
recorded and if desired, retrieve the call from voicemail. ViewCall does
not just display calls; it identifies callers and collects important data
about them. With this information, ViewCall can retrieve records from
Personal Information Managers (PIMSs) and display them on screen
automatically before the call is answered.
- - VIEWMAIL -- ViewMail makes voice and fax messages available on a
desktop PC. Using a Microsoft Windows interface, ViewMail displays the
sender's name, subject and the date and time messages were sent. Messages
are managed with a few clicks of ViewMail's easy-to-use buttons, letting
the user hear, reply, redirect, archive, delete and leave messages, and
rewind, pause and fast forward them during playback. With a sound device
on a multimedia PC, ViewMail allows a user to play and record messages
without picking up the telephone.
- - VIEWFAX -- ViewFax gives a user complete fax handling capabilities.
ViewFax also enables the user to redirect faxes to other subscribers,
managing inbound and outbound faxes from any networked PC. ViewFax works
with the Active Fax module to notify the user, via telephone, when new
faxes arrive, and it also works with the ViewMail module to show the
status of inbound and outbound faxes. Using Print-to-Fax, ViewFax also
integrates with personal database applications, so each user can deliver
faxes to any contact or several contacts at once, in just a few seconds
right from their desktop.
- - E-MAIL INTEGRATION -- The E-Mail Integration package provides 24-hour
two-way access to e-mail without a laptop or modem connection. When
users checks their universal mailbox, the E-Mail Notify/Delivery module
includes e-mail with voice and fax messages. Information is provided about
each message so they can be quickly prioritized. The software also
provides the option of forwarding e-mail to the nearest fax machine. With
the E-Mail Reader module, users can listen to any e-mail message using
text-to-speech conversion, and then record a reply that is sent as a voice
mail message or an e-mail attachment.
- - VIEWCALL PLUS -- ViewCall Plus uses the power of Telephony Application
Programming Interface (TAPI) and Telephony Services Application
Programming Interface (TSAPI) to provide complete control of inbound and
outbound calls with the use of a windows-based mouse. Using the power of
TAPI and TSAPI, ViewCall Plus has three integrated windows: the Telephone
Control window shows the flow of calls to and from the
telephone extension; the Call Log window records all call activity; and
the Contact List window manages data about each caller. Setting
up conference calls is accomplished by dragging and dropping
contacts to the Telephone Control Window. ViewCall Plus prevents callers
from being disconnected or lost during transfer.
OTHER PRODUCTS AND FEATURES -- PhoneMax is the Company's first
stand-alone CTI software product. It provides the power of TeLANophy's
ViewCall Plus on a stand-alone PC without a voice processing system and
without a LAN. It can be used in any size business, by any number of people,
with a TAPI or TSAPI compliant telephone system. Active Fax gives users of
Repartee and Replay Plus complete fax handling capabilities. It includes fax
mail to store incoming faxes electronically and fax-on-demand to let outside
callers retrieve documents from a fax library. To leverage its core product
technology, the Company has also developed a specialized vertical market
application for the lodging and hospitality industry. The Company's
Hospitality Package provides hotel guests with easy, timely and accurate
messaging that is available in several
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multilingual guest conversation modules. It increases the efficiency of the
hotel office staff by providing unified messaging and on-screen call
management. Optional features, such as tape backup, disk redundancy and tool
kits, are also offered with Repartee and Replay Plus, and can be configured
by dealers according to a particular end-user's application. In the future,
the Company may develop similar applications for other vertical markets.
The Company does not presently customize its products for dealers or
end users, but does perform limited feature customizations as requested by
certain OEM customers.
PRODUCT TECHNOLOGY
Each of the Company's voice processing products includes the following
principal components: an IBM-compatible PC platform; one or more voice
processing circuitboards (voice boards), which contain signal processors to
compress and digitize voice and detect various tones; and the
Company-designed software. The diagram below illustrates a sample
configuration of a Repartee installation:
(See Appendix 1 for diagram description)
REPARTEE ROUTES INCOMING CALLS TO TELEPHONES VIA THE SWITCH. UNANSWERED
CALLS ARE ROUTED BACK TO VOICE MAIL. FAX CALLS ARE AUTOMATICALLY ROUTED TO A
FAX MACHINE OR SAVED IN FAX MAIL FOR TELEPHONE RETRIEVAL. SUBSCRIBERS CAN
ACCESS BOTH VOICE MAIL AND FAX MAIL FROM ANY EXTENSION OR FROM THE PUBLIC
TELEPHONE NETWORK.
The following diagram illustrates a sample configuration of Repartee
with TeLANophy features:
(See Appendix 2 for diagram description)
BY INSTALLING A NETWORK INTERFACE CARD IN THE REPARTEE/TELANOPHY
SERVER, AND CLIENT SOFTWARE IN THE DESKTOP PC, REPARTEE CAN COMMUNICATE
ACROSS A LAN. REPARTEE SENDS CALLER INFORMATION TO THE DESKTOP PC WHEN
ROUTING INCOMING CALLS. MESSAGES IN VOICE MAIL CAN BE GRAPHICALLY MANAGED
THROUGH A DESKTOP PC AND LISTENED TO VIA TELEPHONE OR A PC SPEAKER.
STORED FAXES CAN ALSO BE VIEWED AT THE DESKTOP. E-MAIL CAN BE LISTENED
TO REMOTELY WITH REPARTEE'S TEXT-TO-SPEECH SYNTHESIZER. VOICE REPLIES CAN
BE RETURNED AS E-MAIL ATTACHMENTS TO THE ORIGINAL SENDER.
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The Company has developed software that enables certain of its products
to be integrated with over 100 different PBX, key system and Centrex
telephone switching systems, which the Company believes represent
approximately 90% of the installed switches in the United States.
The following is a list of certain major telephone switching systems with
which the Company's Repartee and Replay Plus products can be integrated:
MANUFACTURER SELECTED SWITCH INTEGRATIONS
AT&T Definity System 75/85, Dimension 400,
Horizon, Merlin II FP2/FP3, System 25
Centrex IAESS, 5ESS, DMS100
Fujitsu Focus 196, Focus Elite, Focus 9600, Starlog (SBCs)
Hitachi HCX5000
Iwatsu ZTD, ADIX
Mitel Panther, SX-50, SX-100/SX-200, SX-200 Digital,
SX-2000
NEC Electra Mark II, NEAX 1400, NEAX 2400, NEAX 2400
with IMG, NEAX 2400 with MMG, NEAX 2400 with SIM,
NEAX 2400 with UMG, Professional I and II
Northern Telecom SL-1, Meridian, Northstar Modular DR3/DR4/DR5
Panasonic 308, 616, 1232, DBS
Premier ESP 816, ESP 1224, ESP 2464, ESP DX, ESP MDX
Rolm CBX 9000 Series, Redwood
Siemens 480, Saturn IIE, SD 192, HCM 200
Telrad 2464
Toshiba DK 24/56/96/280, Perception, Strata VI/XII/XX,
Strata VI/XII/XXE, Strata VI/XII/XXER2
Vodavi Starplus, Starplus Digital
All of the Company's software is written to standard PC hardware and
operating system architecture. Repartee and Replay Plus also conform to Audio
Messaging Interchange Specification (AMIS) networking standards. Replay and
Replay Plus are presently based on the Microsoft DOS operating system. Early
in 1994, Repartee migrated to IBM's OS/2 operating system. The Company is in
the process of developing the use of the Microsoft Windows NT operating
system in its more complex products.
SALES AND MARKETING
The Company achieves broad market coverage for its products through a
variety of wholesale distribution channels, which the Company believes to be
optimal considering the technical knowledge and skill required to sell and
install voice processing products. Domestically, the Company distributes its
products primarily through a nationwide network of over 700 independent
telephone system dealers, and also through OEM arrangements with various
manufacturers of telephone systems and business equipment. While the Company
supports its dealers and OEMs with Company personnel, this distribution
strategy limits the Company's selling expense overhead by largely
avoiding the costs of direct sales, installation and customer support
activities. The Company leverages its sales efforts through its affiliation
with numerous established dealer and OEM sales organizations, thereby
achieving exposure to the substantial installed customer bases of these
organizations. A similar distribution strategy is being pursued for the
Company's foreign sales. The Company has employees engaged in domestic sales,
sales management and dealer or OEM support activities,
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has sales representatives in Australia, Canada and the United Kingdom, and
has distribution relationships with dealers, distributors or OEMs in 28
other foreign countries. The following table illustrates the respective
amounts and percentages of the Company's revenues contributed by sales
through each of these channels during the periods shown:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------
1996 1995 1994
----------------- --------------- ----------------
(Dollars in thousands)
SALES PERCENT SALES PERCENT SALES PERCENT
<S> <C> <C> <C> <C> <C> <C>
Domestic sales:
Dealers $33,081 73.3% $28,275 76.5% $21,403 76.1%
OEMs 5,644 12.5 4,539 12.3 3,637 12.9
------- ----- ------- ----- ------- -----
Subtotal 38,725 85.8 32,814 88.8 25,040 89.0
International
sales: 6,413 14.2 4,136 11.2 3,081 11.0
------- ----- ------- ----- ------- -----
Total $45,138 100.0% $36,950 100.0% $28,121 100.0%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
The Company's marketing effort is focused on small- to
medium-sized businesses, as well as small or local offices of larger
companies. The Company's products are utilized by a broad variety of
enterprises in manufacturing, retail, service, health-care, governmental and
institutional settings. The Company markets its products principally by
attending trade shows and advertising in periodicals oriented toward dealers
and end users.
DOMESTIC DEALER NETWORK
The Company's domestic dealer network consists of over 700
independent telephone system dealers. A typical dealer for the Company's
products is a small business operator who primarily sells telephone systems
to small- and medium-sized businesses and relies upon the Company's products
to augment such sales. Most dealers also handle competing voice processing
products. The Company attempts to maintain relationships with a large number
of dealers and, because of the potential for dealer turnover, considers it
advantageous not to become overly dependent upon a few dealers.
The Company believes that the loyalty of its dealers is dependent upon
maintaining and enhancing the value inherent in its products and the quality
of its dealer support. Dealers are required to attend initial
Company-sponsored training sessions on system usage, installation,
maintenance and customer support. Advanced training is also available on an
ongoing basis. The Company maintains a staff of technical and sales support
personnel who are available to assist dealers, free of charge. The dealer
network is managed by full-time regional and divisional managers, who often
accompany dealers on sales calls and are compensated through a commission
plan based on quarterly quotas.
Since the company began selling TeLANophy systems in April of 1994, it
has been necessary to augment additional training for its dealer network.
Sales and installation of TeLANophy requires both telephony and computer
networking expertise. The greater technical complexity of these products
requires a level of PC and LAN technical knowledge and support capability
that only a small portion of independent telephone system dealers presently
have. The Company provides advanced training for system usage, installation,
maintenance and customer support. In addition, the Company is currently
pioneering the creation of a new channel of distribution for these products,
as evident in the recent strategic agreement with Inacom Corporation, a
technology management services company.
Dealers normally purchase turnkey voice processing systems from the
Company, but may also purchase voice board-and-software kits that
they can combine with PCs of their own selection. Dealers provide
installation and post-sale customer service, and often sell maintenance
contracts along with the
-8-
<PAGE>
Company's products. Dealers are subject to agreements with the Company
covering matters such as payment terms, protection of proprietary rights and
nonexclusive sales territories, but these agreements do not restrict the
dealer's ability to carry competing products and are terminable by either
party on short notice.
ORIGINAL EQUIPMENT MANUFACTURERS (OEMs)
The second major channel of distributing the Company's products is through
domestic OEMs, who are typically manufacturers of telephone systems,
including Panasonic Communications and Systems Company, NEC America, Inc.,
Electronic Tele-Communications, Inc., Harris Corporation, Comdial
Corporation, and Inter-Tel Equipment, Inc. The Company has had long term
relationships with a number of these manufacturers, and believes that its OEM
relationships enable it to develop up-to-date switch integrations, with
broader features for the OEM's switches, and to gain early insight into
market trends. In addition, by customizing its products to take advantage of
the unique features of a specific OEM telephone system, the Company is able
to further establish its voice processing systems as the product of choice
for companies wanting to leverage their existing hardware and software
investments.
OEMs generally market the Company's products under their own equipment
name, with their own literature, and through their own sales and technical
support networks. Domestic OEM contracts typically have a term of one or more
years and provide for volume discounts and initial or minimum sales volumes.
INTERNATIONAL SALES
Voice processing systems have only recently
experienced wide acceptance in most foreign countries due
to various factors such as less advanced communications infrastructures,
cultural differences and regulatory requirements. The Company, however,
believes that the current markets in Australia, Japan and much of Western
Europe exhibit characteristics similar to the U.S. market in the mid-1980s.
In these regions, a few large organizations have installed voice processing
systems, and product inquiries by potential customers and distributors are
increasing. Although the Company believes that smaller enterprises in most
developed countries have the same needs for improved telephone communications
as in the United States, it is difficult to predict the rate and extent of
future development of demand for voice processing products in these markets.
The Company believes that alliances with local entities familiar with local
telephone systems and local business conditions are important to
successful penetration of most foreign markets.
The Company's international distribution strategy, like its domestic
strategy, seeks broad market coverage through a variety of wholesale
distribution channels. The Company's products are distributed internationally
through arrangements that differ by country, including dealerships, national
distributorships, and relationships with foreign OEMs (such as NEC
Corporation, Phillips Communications Systems B.V., Crane Telecommunications,
Ltd., and Grupo Delta Delta Telecom). The Company has offices in Australia,
Canada, and the United Kingdom. In addition, the Company's products are
presently sold through dealers or distributors in 28 other countries. The
Company sells its products to international customers through Active Voice
International Corp., a wholly-owned "foreign sales corporation" established
to obtain certain U.S. federal income tax benefits.
Sales of voice processing products in foreign countries often require
additional configuration to adapt to local telephone systems or signal
standards. Conversion to foreign language and local conversation patterns has
historically been performed by the local dealer, distributor or OEM; however,
the Company intends to increase its research and development efforts to
localize its core products. Foreign sales also frequently require governmental
approvals of part or all of the voice processing system, typically relative to
electrical safety and compatibility with local telephone systems and equipment.
To date, component approvals have been obtained primarily by the voice board
manufacturer.
-9-
<PAGE>
PRODUCT SUPPORT
The Company's dealers and OEM customers are primarily responsible for
supporting end users who purchase one of the Company's products. The Company
does, however, provide a substantial amount of technical support to its
dealers and OEM customers, at no additional cost to them. The Company
maintains a technical support staff, devoted to dealer and OEM support.
Technical support is available on a toll-free basis 12 hours per day on
weekdays and emergency support is available on weekends and holidays. The
Company also generally provides a limited warranty on elements of its
products, permitting factory returns within 12 months after sale. Although
the Company does not offer maintenance contracts for its systems, dealers
often independently sell maintenance contracts to end users.
PRODUCT DEVELOPMENT
The Company believes that it has numerous product development
opportunities, which it intends to pursue principally through the development
of software, with very little effort or expense devoted to hardware
development or modification. The Company believes that its current products
are competitive with products offered by others in its industry segment.
Nonetheless, it believes that it must continue to make substantial
expenditures on product development in order to maintain its competitive
position. The Company has not to date capitalized any of its software
development costs.
The Company's product development efforts are performed by four engineering
groups. The Enterprise/Server Products group responds to the needs of the high
end offering, Repartee, as well as switch integrations and vertical market
applications. The Small Business Systems group works on solutions for that
segment, specifically, Replay and Replay Plus. The Desktop/Client Products group
concentrates on the TeLANophy products. Advanced Products and Technology focuses
on the development of new products and features that the Company believes will
be important on a three to five year horizon.
Voice processing systems are often considered "mission critical" to an
end-user's business. The importance of incoming business calls, coupled with
the real-time nature of voice processing functions, makes system reliability
an important competitive requirement. A separate staff of engineers is
devoted to product testing and quality assurance. The Company has not in the
past experienced any significant post-release errors or bugs in its products,
but there can be no assurance that such problems will be avoided in the
future, particularly as its products become more complex and sophisticated.
MANUFACTURING
The Company's product strategy emphasizes the development of software as
opposed to hardware, and the use of standard PC-related hardware components
in its products, in part to limit its manufacturing activity. The Company's
manufacturing operations consist primarily of final assembly and
quality-control testing of materials, subassemblies and systems. The Company
does not manufacture or perform significant modifications on any hardware
components, and is therefore dependent upon third-party manufacturers or
vendors of certain critical hardware components such as PCs and circuitboards.
The Company's products incorporate a number of commercially available
application cards, fax boards, voice boards and other circuitboards that enable
integrations with certain telephone switches. Voice boards are available in
quantity from very few domestic suppliers. To date, the Company's products have
incorporated only voice boards manufactured by Dialogic Corporation, primarily
because of the cost and effort required to develop telephone switch integrations
for an alternate voice board. Although Dialogic Corporation has been a reliable
and timely source of voice boards, for strategic reasons the Company is in the
process of developing a second source for voice boards.
-10-
<PAGE>
COMPETITION
The voice processing industry in general is highly competitive, and the
Company believes that the competitive pressures it faces are intensifying. The
Company has, however, been successful in this competitive environment in the
past, ranking third behind only AT&T and Northern Telecom in total voice
messaging systems shipped in 1995, according to domestic industry statistics.
The segment of the industry that supplies voice processing systems to
small- and medium-sized businesses and offices is extremely competitive,
having endured intense price competition and pressure on margins in the past
few years. This industry segment has also experienced several recent new
market entrants and consolidations of smaller competitors into larger
entities. In the domestic dealer channel of distribution, product pricing,
system features, ease of use and installation, technical and sales support,
and product reliability are the primary bases of competition. Voice
processing system manufacturers compete intensely for the loyalties and
attention of these independent telephone system dealers. In the domestic OEM
channel, product pricing is important but other factors such as product
quality and reliability, ease of use and OEM support are also significant
competitive factors.
The Company's principal competitors, at present, fall into two categories:
telephone equipment manufacturers that offer their own voice processing
systems, or a private label OEM system not produced by the Company (for
example: AT&T, Northern Telecom, Rolm Corporation and Toshiba
America Information Systems, Inc.); and independent voice processing system
manufacturers whose products integrate with multiple telephone systems and
either are based on proprietary hardware (for example, Centigram
Communications Corporation and Octel Communications Corporation), or are
PC-based, like the Company's products (for example, Applied Voice
Technologies Inc., Microlog Corporation, and Compass Technology, Inc.). The
same principal competitors are encountered in all the Company's distribution
channels, with the addition of Comverse Technology, Inc., a U.S.-based
manufacturer encountered frequently in the European market. The Company's OEM
customers compete with the Company's dealer network for sales to certain
customers. The Company's voice processing systems also compete indirectly
with voice processing services offered by independent service bureaus and
other companies. Such services are offered by most Regional Bell Operating
Companies (RBOCs), which could also become significant direct competitors if
certain existing judicial restrictions on their business activities were to
be relaxed. The Company does not presently have dealer or OEM relationships
with any RBOCs.
The Company has limited patent protection for its products and believes
that patents generally will not impose significant barriers to entry into the
Company's market, especially by companies with established technical
capabilities and market positions in related technologies. The Company
anticipates intensified competition from larger companies having
substantially greater technical, financial and marketing resources than the
Company, as well as larger customer bases and greater name recognition than
the Company. As the Company's products evolve to further integrate telephones
with PCs, the Company anticipates that it will encounter a broader variety of
competitors, including new entrants from related computer and communications
industries, and added competition as it seeks to augment its distribution
network to include more dealers with PC and LAN expertise.
PROPRIETARY RIGHTS
The Company holds four patents (expiring 2008 to 2012) relating to: (1)
detection of telephone signaling tones; (2) detection of stutter tones for
CO-based voice mail; (3) method and apparatus for processing a live incoming
call in a communication system; and (4) configurable telephone interface for
electronic devices. In general, however, the Company has limited patent
protection for its products. While the Company's success will depend in part
upon its ability to protect its technology, the Company believes that
technological expertise, innovation and product value are more critical to its
success. The Company has copyrights on elements of its products, and also
attempts to protect its software through a trade secrets program that involves,
among other things, using various forms of copy protection in its systems and
obtaining confidentiality agreements. The Company cannot guarantee that its
-11-
<PAGE>
efforts to protect its intellectual property will be effective to prevent
misappropriation, reverse engineering or independent development by
competitors.
In the course of its product development efforts, the Company from time to
time identifies certain technologies owned by third parties that either would
be useful to incorporate in its products or are necessary in order to remain
competitive in light of industry trends. In these cases, the Company has in
the past sought to obtain licenses of such third-party technologies. The
Company expects that it will continue to find it desirable or necessary to
obtain additional technology licenses from third parties in the future, but
there can be no assurance that any particular license will be available at
all, or on acceptable terms, at any future time.
The voice processing industry is characterized by rapid technological
change, with frequent new product and feature introductions. As a result,
industry participants often find it necessary to develop products and
features similar to those introduced by others, with incomplete knowledge of
whether patent protection may have been applied for or may ultimately be
obtained by competitors or others. The voice processing industry has
historically witnessed numerous allegations of patent infringement among
competitors, and considerable related litigation. The Company itself had
received claims of patent infringement from several parties, including
certain competitors, such as Dytel Corporation (a subsidiary of Syntellect
Inc.) and VMX, Inc., (a subsidiary of Octel Communications Corporation), both
of whom have since licensed patented technology to the Company. Although the
Company's investigation of some of these claims has been limited by the
claims' lack of specificity, by the limited availability of factual
information and documentation related to the claims and by the expense of
pursuing exhaustive patent reviews, the Company believes, based in part upon
its investigations and upon discussions and correspondence with its patent
counsel, that its systems do not currently infringe valid patents of any of
such claimants. In response to prior infringement claims, the Company has
pursued and obtained nonexclusive licenses entitling the Company to utilize
certain fundamental patented voice mail and automated attendant functions
that are widely licensed and used in the voice processing industry. These
licenses expire upon expiration of the underlying patents. Although the
Company believes that it currently owns or has adequate rights to utilize all
material technologies relating to its products, as it continues to develop
new products and features in the future, it anticipates that it may receive
additional claims of patent infringement. Such claims could result in the
Company's incurring substantial legal expenses and being required to obtain
licenses, pay damages for infringement, or cease offering products that
infringe such patents.
Active Voice, Repartee, Replay Plus, Replay, TeLANophy, ViewMail,
ViewCall, ViewCall Plus, and Resource are registered trademarks, and ViewFax,
E-Mail Reader, PhoneMax and ActiveNet are trademarks of Active Voice. All
other trademarks used herein are the property of their respective owners. The
names of the Company and its products are also protected or sought to be
protected to varying degrees by filings in various foreign countries.
EMPLOYEES
At March 31, 1996, the Company had 213 full-time employees, including 24
in finance and administration, 19 in manufacturing, 71 in engineering and
product development, and 99 in sales, marketing and technical support, as
well as 19 part-time employees. Company employees enter into agreements
containing confidentiality restrictions, as well as provisions relative to
noncompetition during employment with the Company and for six months after
termination. The Company has never had a work stoppage and no employees are
represented by a labor organization. The Company considers its employee
relations to be good.
-12-
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters and administrative, engineering, manufacturing
and marketing operations are located in leased space in Seattle, Washington
under a lease expiring in June 2002, which the Company has a right to renew
for two additional five-year periods. Sales offices in Melbourne, Australia
and London, England are located in leased facilities under leases expiring in
August 1997 and September 2000, respectively. The Company believes that these
facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available as needed in the future on
commercially reasonable terms. See Note 7 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected annually at the
meeting of the Board of Directors held in conjunction with the annual
meeting of stockholders. The following are the current executive officers of
the Company:
NAME AGE POSITION
- ---------------------------- --- -------------------------------------
Robert L. Richmond 45 Chief Executive Officer and
Chairman of the Board
Robert C. Greco 41 Vice President -- Product Development,
Secretary, Treasurer and Director
Douglass S. Anderson 46 Vice President -- Sales and Marketing
Jose S. David 39 Chief Financial Officer
ROBERT L. RICHMOND, a co-founder of the Company, has been Chief
Executive Officer and Chairman of the Board of the Company since its
inception in 1983. From 1971 to 1980, Mr. Richmond was a consultant, and from
1980 to 1983 he was a project manager for Intermetrics Incorporated, a public
software company, performing software validation for NASA and The Boeing
Company, and creating new products for the airline industry. Mr. Richmond
holds a Bachelor of Computer Science and Engineering from Massachusetts
Institute of Technology.
ROBERT C. GRECO, a co-founder of the Company, has been a director and
Vice President--Product Development of the Company since its inception in
1983. from 1977 to 1983, Mr. Greco worked as an independent software
consultant for such firms as The Boeing Company, Scandinavian airlines System
(Denmark) and General Electric Company. Mr. Greco holds a Bachelor of Arts,
Mathematics, from City University of New York, and a Masters of Science,
General Systems Science, from the State University of New York. Mr. Greco was
a director of the Washington Software Association from 1992 to 1994.
DOUGLASS S. ANDERSON joined the Company in 1989 as National Sales
Manager and was appointed Vice President--Sales and Marketing on July 1,
1995. Mr. Anderson was Vice President--Sales and Marketing at Automation
Electronics Corporation between 1986 and 1989. Prior to that, he served as
Western Regional Sales Manager for Code-A-Phone. Mr. Anderson holds a
Bachelor of Science in Marketing from the University of Southern California
and a Master of Business Administration from Arizona State University.
JOSE S. DAVID joined the Company in 1989 as its Controller and Manager
of Operations and was named Chief Financial Officer in July 1992. From 1984 to
1989, Mr. David was Manager of Finance for Wang Laboratories, Inc., a
computer manufacturer. Prior to that, he was employed by Price Waterhouse, an
independent public accounting firm. Mr. David is a Certified Public
Accountant and holds a Bachelor of Arts in Business Administration,
Accounting, from the University of Washington.
- 14 -
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QUARTERLY FINANCIAL DATA AND MARKET INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended March 31, 1996 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $10,407 $11,292 $12,437 $11,002
Gross profit 6,606 7,221 7,714 6,579
Research and development expense 1,232 1,322 1,462 1,690
Sales and marketing expense 2,486 2,720 3,094 3,191
General and administrative expense 957 1,127 1,093 875
Operating income 1,931 2,053 2,066 821
Net income 1,428 1,522 1,543 669
Net income per common share $0.31 $0.33 $0.33 $0.14
Shares used in per share calculations 4,629 4,654 4,652 4,639
Stock price range
High $29.50 $33.00 $30.50 $28.50
Low $24.50 $25.75 $24.25 $11.00
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended March 31, 1995 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $8,274 $8,735 $9,917 $10,024
Gross profit 5,431 5,724 6,380 6,475
Research and development expense 973 1,016 1,125 1,249
Sales and marketing expense 2,055 2,186 2,462 2,439
General and administrative expense 884 918 930 930
Operating income 1,520 1,605 1,863 1,858
Net income 1,142 1,199 1,386 1,383
Net income per common share $0.25 $0.26 $0.30 $0.30
Shares used in per share calculations 4,634 4,599 4,579 4,602
Stock price range
High $22.25 $22.25 $23.00 $28.25
Low $17.00 $16.00 $19.50 $20.25
</TABLE>
The stock price range reflects the range of trading prices for
each period, as reported by the Nasdaq Stock Market. The Company has not
paid cash dividends on its Common Stock. At present, the Company intends
to retain earnings for the expansion of its business and does not
anticipate declaring a cash dividend in the near future. As of March 31,
1996, there were approximately 100 stockholders of record.
- 15 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales $ 45,138 $ 36,950 $ 28,121 $ 18,548 $14,309
Operating income 6,871 6,845 4,984 2,187 1,964
Net income 5,162 5,110 3,579 1,587 1,450
Net income per common share $ 1.11 $ 1.11 $ 0.88 $ 0.42 $ 0.38
Average number of common and
common equivalent shares outstanding 4,644 4,603 4,062 3,778 3,816
BALANCE SHEET DATA
Working capital $ 20,912 $ 12,147 $ 10,409 $ 6,220 $ 5,027
Total assets 37,400 28,698 25,411 10,768 7,738
Total debt 0 0 0 0 0
Series A Convertible preferred stock 0 0 0 3,965 3,965
Total stockholders' equity $ 31,797 $ 25,450 $ 20,943 $ 3,404 $ 2,025
</TABLE>
- 16 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- ------------------------------------------------------------------------------------------
Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $45,138 22.2% $36,950 31.4% $28,121
- ------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales to the Company's domestic dealer network increased 17.0%
during the year ended March 31, 1996, reflecting continued increased customer
demand for PC-based voice processing systems. Net sales to the domestic
dealer network represented 73.3% and 76.5% of total net sales in the years
ended March 31, 1996 and 1995, respectively. Of the aggregate increase in net
sales to the domestic dealer channel, approximately 30% was attributable to
increased unit sales of Replay, partially offset by lower average selling
prices of the systems (during the third quarter of fiscal 1996, the Company
announced a 25% reduction in the selling price of the Replay product line.)
In addition, approximately 25% of the aggregate increase in net sales to the
domestic dealer network was attributable to increased unit sales of Replay
Plus systems, and approximately 25% was attributable to increased sales of
TeLANophy software, hospitality and fax products and switch integration
packages. During the year ended March 31, 1996, the Company added
approximately 170 new dealers to its domestic distribution channel and
expanded its domestic sales force by approximately 10% to support them.
Net sales to original equipment manufacturers (OEMs) increased by 24.3%
during the year ended March 31, 1996. Net sales to OEM customers represented
12.5% of total net sales for the year ended March 31, 1996, compared to 12.3%
of total net sales for the year ended March 31, 1995. The aggregate increase
in net sales in the OEM channel was principally attributable to an
approximately 300% increase in unit sales of Replay, primarily to a single
new OEM customer. The increase in unit sales of Replay was partially offset
by a decline in unit sales of Repartee kits, particularly during the fourth
quarter of fiscal 1996, as the Company's largest OEM customer, Comdial,
purchased the manufacturer of a competing product line. As of March 31, 1996,
the Company had six domestic OEM relationships. The largest OEM customer
accounted for approximately 43% of total OEM sales, and approximately 5% of
total Company sales during fiscal 1996, which declined from prior year
amounts.
Net sales to international customers increased by 55.1% during the year
ended March 31, 1996, reflecting increased penetration of international voice
mail markets and the successful launch of new products for international OEM
customers. International sales represented 14.2% of total net sales for the
year ended March 31, 1996, compared to 11.2% of total net sales for the prior
year. Approximately 50% of the aggregate increase was due to increased unit
sales of Replay Plus. An additional 15% of the aggregate increase in net
sales to international customers was attributable to Repartee kits, due to
both increased unit sales and a shift to larger average port sizes. During
fiscal 1996, the Company significantly expanded its UK operations and signed
an agreement with Crane Telecommunications Ltd. to provide a fully integrated
voice processing system for the growing British market. In January 1996, the
Company announced an OEM agreement with Grupo Delta of Mexico whereby the
entire line of Active Voice products will be marketed under the Grupo Delta
label. Beyond the usual risks associated with foreign sales (currency
fluctuations and restrictions; export-import regulations; customs matters;
foreign collection problems; and military, political and transportation
risks), the Company's international sales involve additional governmental
regulation, product adaptations to local languages and switching systems, and
uncertainties arising from local business practices and cultural
considerations.
- 17 -
<PAGE>
During fiscal 1996, revenue from TeLANophy was not significant
(less than 5%); however, the Company experienced growing demand for TeLANophy
systems during the last six months of the fiscal year. Sales and installation
of TeLANophy requires both telephony and computer networking expertise. The
Company is pioneering the creation of a new channel of distribution for these
products.
The Company experiences significant quarterly variability in the
level of sales through its three distinct distribution channels. The
diversification provided by these three channels has in the past reduced the
quarterly volatility of aggregate net sales.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales to the Company's domestic dealer network increased 32.1%
between 1994 and 1995, reflecting continued increased customer demand for
PC-based voice processing systems. Of the aggregate increase in net sales,
approximately 40% was attributable to increased unit sales of Replay Plus,
approximately 30% was attributable to increased unit sales of Repartee
systems, and approximately 20% was attributable to increased unit sales of
Replay. During the year ended March 31, 1995, the Company added approximately
140 new dealers to its domestic distribution channel and expanded its
domestic sales force by approximately 25% to support them. Increased
productivity of the individual regional sales managers resulted in sales
growth exceeding the growth in sales personnel.
Net sales to OEMs increased by 24.8% during the year ended March
31, 1995. Of the aggregate increase in net sales, approximately 85% was
attributable to increased unit sales of Repartee kits. As of March 31, 1995,
the Company had six domestic OEM relationships. The largest OEM customer
accounted for approximately 66% of total OEM sales, and approximately 8% of
total Company sales during fiscal 1995, which were comparable to prior year
amounts. In December 1994, Active Voice signed an agreement with the
Corporate Networks Group of NEC America, Inc. (NEC America), allowing NEC
America to market and distribute the full line of Active Voice products
through the NEC America Associate Network of dealers. The two companies have
also jointly developed a proprietary digital voice processing system for the
Electra Professional telephone system that NEC America markets under the
trade name ElectraMail.
Net sales to international customers increased by 34.2% during the
year ended March 31, 1995, reflecting increasing penetration of existing
international voice mail markets as well as entry into new regions.
Approximately 60% of the aggregate increase was due to increased unit sales
of Repartee Systems. International sales represented 11.2% of total net sales
for the year ended March 31, 1995, compared to 11.0% of total net sales for
the prior year. International sales during fiscal 1994 included an initial
inventory stocking order for NEC Corporation (NEC), an international OEM
customer, without which international sales would have represented 8.7% of
net sales. During fiscal 1995, Active Voice established two joint ventures
to market its products in China and in Belgium, the Netherlands, Luxembourg,
Germany and France. During December 1994, Active Voice announced that it had
signed an agreement with Philips Communications Systems B.V. (Philips) of
Eindhoven, the Netherlands, under which Philips markets and distributes
Active Voice products in 22 countries where Philips' full line of PBX and
telephone key systems are sold. The jointly engineered products began
shipping in April 1995.
During fiscal 1995, Active Voice introduced the first modules of
TeLANophy, the Company's local area network (LAN) product. Revenue from
TeLANophy was not significant during fiscal 1995.
-18-
<PAGE>
GROSS MARGIN
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Gross profit $28,120 17.1% $24,011 27.1% $18,894
Percentage of net sales 62.3% 65.0% 67.2%
- -----------------------------------------------------------------------------------------
</TABLE>
The Company's gross margin varies in part depending upon the mix
of higher-margin voice board-and-software kit sales (an option available only
with Repartee and Replay) and software-only sales (available only to OEM
customers) as opposed to turnkey system sales. The proportion of sales
contributed from each distribution channel also affects the overall gross
margin, as OEM and International sales historically have had higher gross
margins than sales to the domestic dealer network.
FISCAL 1996 COMPARED TO FISCAL 1995
The most significant factor contributing to the decline in gross
margin between fiscal 1996 and 1995 was a shift in the sales mix to the lower
margin Replay product line. A 25% price reduction on Replay implemented
during the third quarter of fiscal 1996 contributed to the shift in sales mix
and reduced the gross margin on Replay units. During the third quarter of
fiscal 1996, the Company made a large one-time sale to a new customer which
was replacing unsatisfactory competing products at its own end-user sites.
The sale was competitively priced to introduce Active Voice products to the
new customer and encourage a long-term relationship. The competitive pricing
also contributed to the decline in gross margin. Other factors leading to the
decrease in gross margin were a reduction in unit sales of OEM kits, as
discussed under "Net Sales", price promotion on the TeLANophy product line
and usage of higher quality PC platforms with increased memory capacity.
Offsetting the decline in gross margin was an increase in the percentage of
net sales to the higher margin international sales channel and increased
sales of high margin TeLANophy and fax-related software. Management expects
that gross margins will continue to decline steadily as a result of price
competition and further shifts in product mix.
FISCAL 1995 COMPARED TO FISCAL 1994
The decrease in gross margin between fiscal 1994 and fiscal 1995
was attributable to a competitive marketplace, shifts in product mix within
sales channels, and increasing PC memory requirements. In the domestic dealer
distribution channel, gross margin was negatively impacted both by a shift
from Repartee kits to lower-margin Repartee systems and by higher unit sales
of the lower-margin Replay product. Inventory stocking sales of high-margin
software-only product to an international OEM customer reduced the decline in
gross margin during fiscal 1994.
RESEARCH AND DEVELOPMENT
GROSS MARGIN
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Research and development $5,706 30.8% $4,363 40.4% $3,107
Percentage of net sales 12.6% 11.8% 11.1%
- -----------------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
The increase in research and development expenses, both in dollar
amount and as a percentage of net sales between comparable periods, was
primarily attributable to an increase of approximately 25% in engineering and
development personnel. The increase in personnel was primarily due to the
Company's effort to localize products for new international markets, as well
as customization of products for new OEM customers, and increasing emphasis
on developing new products, particularly CTI-related products. During
-19-
<PAGE>
fiscal 1996, the Company announced several significant product releases
including a new fault-tolerant Large System Platform (LSP) with hot-swappable
components and the ability to handle up to 60 ports of voice processing;
E-Mail Integration which provides access to e-mail messages by telephone and
fax; and PhoneMax which provides incoming and outgoing call management and
the ability to set up conference calls using the drag and drop features of a
Windows-based desktop PC.
During fiscal 1996, the Company announced its intention to
allocate additional resources to the development of products for the
international market. The Company believes that the international market has
significant growth opportunities but that localization of its products will
be necessary to successfully penetrate the world market for voice processing
equipment. The Company also believes that in order to remain competitive in a
rapidly changing technological environment, it will continue to be necessary
to allocate significant resources to the development of new products. The
Company expects the dollar amount of research and development expenditures to
continue to increase for the foreseeable future, and that these expenses as a
percentage of sales will vary from period to period.
FISCAL 1995 COMPARED TO FISCAL 1994
The increase in research and development expenses, both in dollar
amount and as a percentage of net sales between comparable periods, was
primarily attributable to an increase in engineering and development
personnel, which grew from 50 at March 31, 1994 to 73 at March 31, 1995, and
related expenses for project-based contract development staff. The increase
in personnel was attributable to the Company's effort to complete and release
two additional TeLANophy modules, localization of products for international
markets, customization of products for newly signed OEM customers, and
increasing emphasis on developing new products and adding customer requested
features to existing products.
SALES AND MARKETING
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Sales and marketing $11,491 25.7% $9,142 19.9% $7,627
Percentage of net sales 25.5% 24.7% 27.1%
- -----------------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Approximately 45% of the aggregate increase in sales and marketing
expenses was due to increased compensation-related expenses associated with
approximately 25% growth in sales and marketing personnel and increased
commission expense due to higher sales levels. Of the total increase in sales
and marketing personnel, approximately one-half represented additional
international and domestic sales representatives and approximately one-half
represented additional support personnel directly associated with service to
the Company's growing base of independent dealers. An additional 20% of the
aggregate increase in sales and marketing expenses was attributable to added
promotional and advertising costs, including trade show-related expenses and
associated travel costs. Sales and marketing expense as a percentage of net
sales increased during fiscal 1996 as growth in personnel exceeded growth in
net sales due to lower than anticipated revenues in the fourth quarter.
FISCAL 1995 COMPARED TO FISCAL 1994
Approximately 45% of the aggregate increase in sales and marketing
expenses was due to increased compensation-related expenses associated with
the growth in sales and marketing personnel from 65 at March 31, 1994 to 84
at March 31, 1995. During fiscal year 1995, the Company doubled the number of
employees associated with its international sales efforts and added six new
domestic regional sales managers. These additions accounted for more than
two-thirds of the increase in sales and marketing personnel. Approximately
-20-
<PAGE>
20% of the aggregate increase was attributable to added promotional costs,
including advertising and trade show-related expenses, including related
travel costs. Sales and marketing expense as a percentage of net sales
decreased during fiscal 1995 due to leveraging fixed sales and marketing
expenses over a growing revenue base.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
General and administrative $4,052 10.7% $3,661 15.3% $3,175
Percentage of net sales 9.0% 9.9% 11.3%
- -----------------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Of the aggregate increase in general and administrative expenses
during the year ended March 31, 1996, approximately 70% was attributable to
higher compensation-related expenses due to an approximate 25% increase in
administrative personnel. General and administrative expenses, being
relatively fixed in nature, decreased as a percentage of net sales due to the
Company's ability to leverage these costs over a growing revenue base.
FISCAL 1995 COMPARED TO FISCAL 1994
Approximately 60% of the increase in general and administrative
expenses during fiscal year 1995 was due to increased compensation-related
expenses primarily associated with the increase in general and administrative
personnel from 32 at March 31, 1994 to 38 at March 31, 1995. An additional
25% of the increase was attributable to added costs associated with SEC
reporting and compliance.
INTEREST INCOME
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest income $701 31.3% $534 163.1% $203
- -----------------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Interest income increased during fiscal 1996 primarily due to
higher average cash and marketable security balances and to a lesser extent,
higher average yields earned on investments. The increase in cash and
marketable security balances was due to positive cash flow generated from
operations.
FISCAL 1995 COMPARED TO FISCAL 1994
The increase in interest income during fiscal year 1995 was
primarily attributable to higher average cash and marketable securities
balances and, to a lesser extent, increasing interest rates. Proceeds from
the Company's initial public stock offering were available for investment
during all of fiscal 1995, compared to the last three and one-half months of
fiscal 1994.
-21-
<PAGE>
INCOME TAX PROVISION
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Income tax provision $2,410 6.2% $2,269 41.1% $1,608
Effective tax rate 31.8% 30.7% 31.0%
- -----------------------------------------------------------------------------------------
</TABLE>
Variations in the customary relationship between the income tax
provision and the statutory income tax rate of 34% result from certain
nondeductible expenses, tax exempt investment income, research and
development tax credits, and the benefit provided by the Company's foreign
sales corporation. The Company expects the effective tax rate to increase in
the future due to the impact of declining research and development tax
credits, tax exempt interest income, and foreign sales corporation benefits
as a percentage of taxable income.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's effective tax rate for fiscal 1996 increased to
31.8% from 30.7% in fiscal 1995. The increase in the effective tax rate was
primarily attributable to the expiration of the research and development tax
credit in June 1995, partially offset by increased tax exempt income from
municipal securities.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's effective tax rate for fiscal 1995 decreased
marginally to 30.7% from 31.0% in fiscal 1994. The decrease in the effective
tax rate was primarily attributable to a significant increase in tax exempt
interest income, offset by declines in the research and development tax
credit, and foreign sales corporation benefit as a percentage of taxable
income.
NET INCOME AND NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Net income $5,162 1.0% $5,110 42.8% $3,579
Percentage of net sales 11.4% 13.8% 12.7%
Net income per common share $1.11 0.0% $1.11 26.1% $0.88
- -----------------------------------------------------------------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Income and net income per common share for the year ended
March 31, 1996 remained essentially even with the prior year despite a 22%
increase in net sales. The decline in net income as a percentage of net sales
was primarily attributable to lower than anticipated revenues in the fourth
quarter, as previously discussed, coupled with a 2.7% decline in gross margin
and gradually increasing operating expenses during fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
The increase in net income during fiscal 1995 over fiscal 1994,
both in dollar amount and as a percentage of net sales, was primarily
attributable to the Company's ability to leverage its fixed selling, general
and administrative costs over a growing revenue base. The percentage increase
in net income per common share lagged behind the percentage increase in net
income due to an increase of approximately 13% in the number of common and
common equivalent shares outstanding. The increase in outstanding shares was
primarily attributable to the 700,000 shares sold in the Company's December
1993 initial public offering
-22-
<PAGE>
being outstanding during all of fiscal 1995, partially offset by the
Company's repurchase of 112,500 shares of common stock during August 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities
increased to $19,068,000, or 51.0% of total assets, at March 31, 1996 from
$15,109,000, or 52.6% of total assets, at March 31, 1995. The Company had net
working capital of $20,912,000 at March 31, 1996.
Accounts receivable, net of allowances, increased to $8,628,000 at
March 31, 1996 from $6,461,000 at March 31, 1995, due to higher sales levels
and an approximate increase of 5% in days sales outstanding. Inventory levels
increased to $5,483,000 at March 31, 1996 from $3,430,000 at March 31, 1995
to meet the increasing raw material stocking requirements due to a
growing sales base and increased number of hardware platform options.
The Company made $1,130,000 in capital expenditures during fiscal 1996,
compared to $1,408,000 during fiscal 1995. The majority of the capital
expenditures during fiscal 1996 consisted of computer equipment and related
hardware for new employees, and expansion of the Company's research
laboratories. The Company currently has no specific commitments with respect
to additional capital expenditures during fiscal 1997, but expects to spend
an aggregate of approximately $1,200,000 for the year.
The Company has a $10,000,000 revolving credit line from a bank for
financing working capital. No borrowings were outstanding under this
agreement during fiscal 1996 or 1995. The agreement expires on September 30,
1996.
The Company believes that ongoing maturity of securities in its
investment portfolio, together with funds from operations and the revolving
credit line, will provide sufficient funds to finance operations for the next
several years.
CERTAIN STATEMENTS IN THIS ANNUAL REPORT CONTAIN "FORWARD LOOKING"
INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995) THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION,
PROJECTIONS FOR SALES AND EXPENDITURES, AND VARIOUS BUSINESS ENVIRONMENT AND
TREND PROJECTIONS. ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY
DEPENDING ON A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE RISKS
DISCUSSED IN DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
- 23 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $45,138,163 $36,949,635 $28,121,000
Cost of goods sold 17,018,072 12,939,000 9,227,410
----------- ----------- -----------
Gross profit 28,120,091 24,010,635 18,893,590
Operating expenses:
Research and development 5,706,412 4,363,202 3,107,372
Sales and marketing 11,490,892 9,141,864 7,626,881
General and administrative 4,051,708 3,661,004 3,175,134
----------- ----------- -----------
Total operating expenses 21,249,012 17,166,070 13,909,387
----------- ----------- -----------
Operating income 6,871,079 6,844,565 4,984,203
Interest income 700,863 533,892 202,873
----------- ----------- -----------
Income before income taxes 7,571,942 7,378,457 5,187,076
Income tax provision 2,410,028 2,268,732 1,607,929
----------- ----------- -----------
Net income $5,161,914 $5,109,725 $3,579,147
----------- ----------- -----------
----------- ----------- -----------
Net income per common share $1.11 $1.11 $0.88
----------- ----------- -----------
----------- ----------- -----------
Average number of common and
common equivalent shares
outstanding 4,643,744 4,603,461 4,061,598
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 24 -
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,389,760 $ 649,553
Marketable securities 7,216,738 3,300,596
Accounts receivable, less allowances of $1,365,000
($934,000 in 1995) 8,628,280 6,460,765
Inventories 5,482,704 3,430,224
Income taxes receivable 334,453
Deferred tax asset 1,023,324 601,177
Prepaid expenses and other assets 774,316 618,709
------------ ------------
Total current assets 26,515,122 15,395,477
Marketable securities 8,461,607 11,158,801
Furniture and equipment, net 2,094,480 1,907,540
Other assets 328,503 235,754
------------ ------------
Total assets $37,399,712 $28,697,572
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,138,073 $1,209,772
Accrued compensation and benefits 1,871,755 1,649,096
Other accrued expenses 762,340 389,178
Income taxes payable 830,888
------------ ------------
Total current liabilities 5,603,056 3,248,046
Commitments
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 2,000,000 - none outstanding
Common stock, no par value:
Authorized shares - 10,000,000
Issued shares, including repurchased shares - 4,976,933 16,790,931 16,104,792
Retained earnings 17,301,477 12,378,168
------------ ------------
34,092,408 28,482,960
Less 421,988 repurchased shares (507,036 in 1995), at cost (2,295,752) (3,033,434)
------------ ------------
Total stockholders' equity 31,796,656 25,449,526
------------ ------------
Total liabilities and stockholders' equity $37,399,712 $28,697,572
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 25 -
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income $5,161,914 $5,109,725 $3,579,147
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 896,624 747,843 530,926
Provisions for accounts receivable 431,000 209,000 160,000
Deferred income taxes (475,577) 144,505 (237,741)
Loss on disposal of equipment 46,434 33,596 26,872
Changes in operating assets and liabilities:
Increase in accounts receivable (2,598,515) (2,321,337) (108,478)
Increase in inventories (2,052,480) (232,763) (1,295,318)
Decrease (increase) in prepaid expenses
and other assets 86,097 (735,429) 13,428
Increase (decrease) in accounts payable 928,301 (372,763) 438,997
Increase in other liabilities 1,962,973 191,340 1,104,784
----------- ------------ ----------
Net cash provided by operating activities 4,386,771 2,773,717 4,212,617
Investing activities
Purchases of marketable securities (4,583,409) (7,349,868) (15,923,025)
Proceeds from sales of marketable securities 3,521,609 7,076,775 3,012,078
Purchases of furniture and equipment (1,129,998) (1,407,668) (768,555)
----------- ------------ -----------
Net cash used in investing activities (2,191,798) (1,680,761) (13,679,502)
Financing activities
Proceeds from exercise of common stock options 565,859 615,987 365,082
Repurchase of common stock (20,625) (2,137,500)
Payment on license agreement (128,183)
Proceeds from issuance of common stock, net of
issuance - costs 9,283,306
----------- ------------ -----------
Net cash provided by (used in) financing
activities 545,234 (1,521,513) 9,520,205
----------- ------------ -----------
Increase (decrease) in cash and cash equivalents 2,740,207 (428,557) 53,320
Cash and cash equivalents at beginning of year 649,553 1,078,110 1,024,790
----------- ------------ -----------
Cash and cash equivalents at end of year $3,389,760 $ 649,553 $1,078,110
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Total
Net Shares Retained Repurchased Stockholders'
Outstanding Issued Earnings Shares Equity
--------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1993 2,807,141 $1,084,652 $ 5,319,793 $(3,000,251) $3,404,194
Issuance of shares upon exercise of
stock options 170,102 365,082 365,082
Tax benefit related to stock options 347,007 347,007
Conversion of Series A Convertible
preferred stock into 740,740 shares
of common stock 740,740 3,964,763 3,964,763
Issuance of shares in public offering 700,000 9,283,306 9,283,306
Net income 3,579,147 3,579,147
--------------- ------------- --------------- ----------- -------------
Balance at March 31, 1994 4,417,983 15,044,810 8,898,940 (3,000,251) 20,943,499
Issuance of shares upon exercise of
stock options 164,414 97,306 (1,510,336) 2,104,317 691,287
Tax benefit related to stock options 962,676 962,676
Repurchase of common stock (112,500) (2,137,500) (2,137,500)
Net unrealized loss on marketable
securities (120,161) (120,161)
Net income 5,109,725 5,109,725
--------------- ------------- --------------- ----------- -------------
Balance at March 31, 1995 4,469,897 16,104,792 12,378,168 (3,033,434) 25,449,526
Issuance of shares upon exercise of
stock options 85,798 149,875 (342,323) 758,307 565,859
Tax benefit related to stock options 536,264 536,264
Repurchase of common stock (750) (20,625) (20,625)
Change in net unrealized loss on
marketable securities 103,718 103,718
Net income 5,161,914 5,161,914
--------------- ------------- --------------- ----------- -------------
Balance at March 31, 1996 4,554,945 $16,790,931 $17,301,477 $(2,295,752) $31,796,656
--------------- ------------- --------------- ----------- -------------
--------------- ------------- --------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-27-
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and computer telephone integration (CTI) products.
The Company's products are sold worldwide through a network of independent
telecommunications dealers and computer resellers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Active Voice International Corp. Intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 highly liquid investments with an original maturity of
three months or less to be cash equivalents. Excess cash is primarily
invested in treasury bills, securities of government agencies, and commercial
paper rated A-1. Cash equivalents are carried at cost, which approximates
fair market value.
MARKETABLE SECURITIES
Marketable securities, which consist primarily of municipal securities, are
carried at market value. Market values are determined based on quoted prices.
Marketable securities are classified in the balance sheet as current and
noncurrent based on maturity dates and the Company's expectation of sales and
redemptions in the following year.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
on a first-in, first-out (FIFO) basis.
The Company currently purchases all of its voice boards, a significant
component of its products, from one supplier. Although there are a limited
number of manufacturers of voice boards, management believes that other
suppliers could provide similar product on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss
of sales, which would affect operating results adversely.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost and depreciation is computed
using accelerated methods over estimated useful lives. Estimated useful lives
are as follows: furniture and fixtures, seven years; office and computer
equipment, five years; and leasehold improvements, the lesser of ten years or
the remainder of the lease term. Repairs and maintenance that do not improve
or extend the lives of the respective assets are expensed in the period
incurred.
-28-
<PAGE>
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
Company will adopt Statement No. 121 in the first quarter of fiscal year
1997, as allowed for in the statement, and based on current circumstances,
does not believe the effect of adoption will be material.
REVENUE RECOGNITION
Revenue is generally recognized upon shipment to customers, with allowances
made for estimated returns. The Company accrues estimated costs of technical
support to customers as the related revenues are recognized.
INCOME TAXES
The provision for income taxes includes federal and state taxes currently
payable and deferred taxes arising from temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Deferred income taxes have been
recorded using the liability method in recognition of these temporary
differences.
SOFTWARE DEVELOPMENT COSTS
No software development costs have been capitalized to date. Under the
Company's current practices of developing new products and enhancements, the
technological feasibility of the underlying software is not established until
substantially all related product development is complete and the product is
released for production.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$292,116, $258,088 and $179,416 in advertising costs during the years ended
March 31, 1996, 1995 and 1994, respectively.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of shares
of common stock outstanding and dilutive common equivalent shares from stock
options, using the treasury stock method.
NOTE 2. MARKETABLE SECURITIES
In May 1993, the FASB issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115). The Company adopted the
provisions of the new standard for investments held as of, or acquired after,
April 1, 1994. Adoption of this standard did not result in a material change
to results of operations or financial condition.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. Management has classified the Company's marketable securities as
available-for-sale, in accordance with provisions of FAS 115. Accordingly,
the securities are carried at fair value, with unrealized holding gains and
losses excluded from net income and recorded as an adjustment to
stockholders' equity. Interest, dividends, and realized gains and losses are
included in net income.
-29-
<PAGE>
The following is a summary of marketable securities at March 31, all of which
are classified as available-for-sale:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Municipal bonds:
Due in one year or less $ 7,246,174 $ 5,821 $(35,257) $ 7,216,738
Due after one year through three 7,721,633 28,553 (31,016) 7,719,170
Due after three years 735,453 10,451 (3,467) 742,437
----------------------------------------------------------
$15,703,260 $44,825 $(69,740) $ 15,678,345
----------------------------------------------------------
----------------------------------------------------------
1995
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Municipal bonds:
Due in one year or less $ 3,313,837 $ 2,099 $ (15,340) $ 3,300,596
Due after one year through three 9,757,328 7,905 (190,223) 9,575,010
Due after three years 1,570,295 17,162 (3,666) 1,583,791
----------------------------------------------------------
$14,641,460 $27,166 $(209,229) $14,459,397
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
Net unrealized holding gains of $103,718 and net unrealized holding losses of
$120,161, net of federal income taxes, during the years ended March 31, 1996
and 1995, respectively, are included as adjustments to retained earnings.
NOTE 3. INVENTORIES
Inventories are comprised of the following:
March 31, 1996 1995
---------- -----------
Computer equipment $2,544,034 $2,219,280
Custom component parts 2,211,527 733,078
Supplies 727,143 477,866
---------- -----------
$5,482,704 $3,430,224
---------- -----------
---------- -----------
-30-
<PAGE>
NOTE 4. FURNITURE AND EQUIPMENT
Major classes of furniture and equipment are as follows:
March 31, 1996 1995
---------- ----------
Office and computer equipment $2,922,758 $2,396,195
Furniture and fixtures 1,477,828 1,200,162
Leasehold improvements 266,379 175,128
---------- ----------
4,666,965 3,771,485
Accumulated depreciation (2,572,485) (1,863,945)
---------- ----------
$2,094,480 $1,907,540
---------- ----------
---------- ----------
NOTE 5. LINE OF CREDIT
The Company has a $10,000,000 revolving line of credit from a bank.
Borrowings under this agreement bear interest at the bank's prime rate or at
LIBOR, plus 1.25%, at the election of the Company. At March 31, 1996 and 1995
there were no borrowings outstanding under this agreement. This agreement
includes certain covenants, including financial covenants requiring that the
Company maintain certain financial ratios. Borrowings under this agreement
are payable on demand if these covenants are not met, or upon the expiration
of the agreement in September 1996.
NOTE 6. INCOME TAXES
During fiscal year 1994, the Company retroactively adopted a change in
accounting for income taxes from the deferred method to the liability method
required by FASB Statement No. 109, "Accounting for Income Taxes." There was
no impact on net income as a result of adopting Statement No. 109.
The principal reason for variations in the customary relationship between the
provision for income taxes and the statutory tax rate applied to income
before taxes is the effect of certain nondeductible expenses, nontaxable
income, and the utilization of research and development tax credits. A
reconciliation from the U.S. statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
Year ended March 31, 1996 1995 1994
-------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate $ 2,574,460 34.0% $2,508,675 34.0% $1,763,606 34.0%
Research and development credit (28,724) (0.4) (163,248) (2.2) (139,633) (2.7)
Tax exempt income (216,500) (2.9) (162,166) (2.2) (43,998) (0.8)
Foreign sales corporation benefit (74,375) (1.0) (97,879) (1.3) (92,281) (1.8)
Other items, net 155,167 2.1 183,350 2.4 120,235 2.3
---------- ----- ---------- ---- ---------- -----
$2,410,028 31.8% $2,268,732 30.7% $1,607,929 31.0%
---------- ----- ---------- ---- ---------- -----
---------- ----- ---------- ---- ---------- -----
</TABLE>
-31-
<PAGE>
The provision for income taxes, primarily related to U.S. federal income taxes,
is as follows:
<TABLE>
<CAPTION>
Year ended March 31, 1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Current taxes on income $2,885,605 $2,124,227 $1,845,670
Deferred income taxes (475,577) 144,505 (237,741)
-----------------------------------------
$2,410,028 $2,268,732 $1,607,929
-----------------------------------------
-----------------------------------------
</TABLE>
Deferred taxes result primarily from temporary differences relating to the
accounting for bad debts, inventories, and certain other accruals expensed for
financial reporting purposes but not currently deductible for income tax
purposes.
Significant components of the Company's deferred tax asset are as follows:
<TABLE>
<CAPTION>
March 31, 1996 1995
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances $ 464,100 $317,560
Accrued compensation and benefits 276,373 147,502
Adjustment to unrealized loss
on marketable securities 8,471 61,900
Other items, net 274,380 162,427
------------------------------------
Total deferred tax assets 1,023,324 689,389
Deferred tax liabilities:
Prepaid expenses and other (88,212)
------------------------------------
Net deferred tax asset $1,023,324 $601,177
------------------------------------
------------------------------------
</TABLE>
The Company made cash payments of income taxes of $1,534,000, $1,832,500 and
$1,290,000, during the years ended March 31, 1996, 1995 and 1994,
respectively.
NOTE 7. LEASE COMMITMENTS
The Company leases its facilities under operating leases with initial terms
of 5 to 10 years. Certain leases contain renewal and escalation clauses and
space expansion provisions. The Company incurred $1,234,414, $1,042,403 and
$690,401, of rent expense for the fiscal years ended March 31, 1996, 1995 and
1994, respectively.
Future minimum rental payments required per fiscal year under leases with
noncancelable lease terms in excess of one year at March 31, 1996 are as
follows:
1997 $1,331,514
1998 1,419,295
1999 1,436,230
2000 1,441,995
2001 1,454,489
Thereafter 1,798,148
----------
$8,881,671
----------
----------
- 32 -
<PAGE>
In connection with the execution of a lease and related amendments, the
Company effectively prepaid rent by paying certain architectural and real
estate fees and costs on behalf of the lessor in exchange for reduced future
lease payments. The prepayments of $263,238 and $259,448 at March 31, 1996
and 1995, respectively, bear interest at the prime rate plus 2% and are
included in prepaid expenses in the accompanying consolidated balance sheets.
An additional $194,640 in related costs are included in prepaid expenses at
March 31, 1996 and other non-current assets at March 31, 1995. These costs
are to be reimbursed by the lessor on January 1, 1997, or alternately, used
to offset rent payments from that date.
NOTE 8. STOCK OPTIONS
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which requires stock-based compensation expense to
be measured using either the intrinsic-value method as prescribed by
Accounting Principles Board Opinion (APB) No. 25 or the fair-value method
described in Statement No. 123. Companies choosing the intrinsic-value
method will be required to disclose the pro forma impact of the fair-value
method on net income and earnings per share. The Company will adopt
Statement No. 123 in the first quarter of fiscal year 1997, as allowed for
in the statement, using the intrinsic-value method of APB Opinion No. 25;
there will be no effect of adopting the Statement on the Company's financial
position or results of operations.
At March 31, 1996 there were 589,248 shares of common stock reserved for
future issuance upon exercise of outstanding stock options and stock options
available for grant under existing option plans. These include 144,046 shares
issuable upon exercise of options granted under the 1984 Incentive Stock
Option Plan and the 1988 Nonqualified Stock Option Plan; 432,077 shares
reserved for issuance under the 1993 Stock Option Plan and the Directors
Stock Option Plan, under which options for 292,293 shares have been granted;
and 13,125 shares reserved for options granted outside of these plans. In
adopting the 1993 Stock Option Plan and the Directors Stock Option Plan, the
Company's Board of Directors determined that no further options would be
granted under the 1984 plan or the 1988 plan.
A summary of the activity of the Company's stock options is as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-----------
<S> <C> <C>
Balance, April 1, 1993 564,317 $0.44 - 7.20
Granted 18,750 7.20 - 21.75
Canceled (12,505) 3.20 - 7.20
Exercised (170,102) 0.44 - 5.40
---------
Balance, March 31, 1994 400,460 0.98 - 21.75
Granted 115,184 15.00 - 21.13
Canceled (4,150) 7.20 - 16.00
Exercised (164,414) 1.60 - 13.50
---------
Balance, March 31, 1995 347,080 0.98 - 21.75
Granted 292,886 12.00 - 28.50
Canceled (104,704) 5.40 - 28.00
Exercised (85,798) 0.98 - 21.13
---------
Balance, March 31, 1996 449,464 $0.98 - 28.50
---------
---------
</TABLE>
At March 31, 1996, options to purchase 213,992 shares were exercisable. The
weighted average exercise price for all outstanding options at March 31, 1996
was $13.33 per share.
- 33 -
<PAGE>
NOTE 9. STOCKHOLDERS' EQUITY
CERTAIN TRANSACTIONS WITH CORPORATE OFFICERS AND OTHERS
During August 1994, the Company repurchased a total of 112,500 shares of its
common stock from a significant stockholder. The purchase price was $19.00
per share for a total of $2,137,500, which was less than the closing price of
the stock on the closing date.
On November 7, 1994, the Company and two of its officers and principal
shareholders entered into an Amended and Restated Buy-Sell Agreement (the
"Agreement") which modified the terms of the original agreement dated
December 31, 1991. Under the Agreement, the Company is required to maintain
$4,250,000 of term insurance on the life of each shareholder. Upon the death
of one of the shareholders, the Company is required to buy up to one-half of
the shareholder's common stock holdings, but in no event, more shares than
can be purchased with the life insurance proceeds. The per share price is
determined by a formula set forth in the Agreement, and is to be paid in cash.
INITIAL PUBLIC OFFERING
In December 1993, the Company completed an initial public offering of
700,000 shares of common stock at $15.00 per share, resulting in total
proceeds of $9,283,306 after deducting underwriting discounts and offering
expenses.
NOTE 10. TECHNOLOGY LICENSES
The voice processing industry is characterized by rapid technological change
and has historically witnessed numerous allegations of patent infringement
among competitors, and considerable related litigation. Such claims have been
made against the Company in the past. In response to certain of these claims,
the Company has pursued and obtained nonexclusive licenses to certain
fundamental patents. Although the Company believes that it currently owns or
has adequate rights to use all material technologies relating to its
products, as it continues to develop new products and features in the future,
it anticipates that it may receive additional claims of patent infringement.
Such claims could result in the Company incurring substantial legal expenses
and being required to obtain licenses, to pay damages, or to cease offering
products that infringe such patents.
Royalty expense on licensed technology was $286,002, $216,172 and $210,004
during the fiscal years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 11. EMPLOYEE BENEFIT PLAN
The Company provides a defined contribution 401(k) profit-sharing plan
covering employees meeting certain eligibility requirements (generally, 21
years of age and six months of service). Company contributions are
discretionary based on annual declarations by the Company's Board of
Directors. The Company made contributions of $102,480, $93,800 and $35,100
for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 12. CONCENTRATION OF CREDIT RISK
The Company distributes its products primarily through a worldwide network
of independent telephone system dealers. The Company also distributes its
products through sales to original equipment manufacturers (OEMs) of
telephone and other business systems who often sell through their own dealer
networks. Sales through the Company's domestic dealer network, OEMs, and
export sales through various international distribution channels represented
73%, 13% and 14%, respectively, of fiscal 1996 revenues; 77%, 12% and 11%,
respectively, of fiscal 1995 revenues; and 76%, 13% and 11%, respectively, of
fiscal 1994 revenues. Export sales aggregated $6,413,000, $4,135,000 and
$3,082,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
- 34 -
<PAGE>
The Company performs ongoing credit evaluations of its customers' financial
condition, and generally no collateral is required. The Company maintains
reserves for credit losses and such losses have historically been within
management's expectations.
- 35 -
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Active Voice Corporation
We have audited the accompanying consolidated balance sheets of Active Voice
Corporation as of March 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits 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 Active Voice Corporation at March 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Seattle, Washington
May 3, 1996
- 36 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-37-
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in part in the
sections captioned "Board of Directors--Nominees for Director" and "Voting
Securities and Principal Holders--Exchange Act Compliance" in the Proxy
Statement for the Company's Annual Meeting of Stockholders scheduled to be
held on August 30, 1996, and such information is incorporated herein by
reference.
The remaining information required by this Item is set forth as
Item 4A in Part I of this report under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the information contained in the section captioned "Compensation and
Benefits" of the Proxy Statement for the Company's Annual Meeting of
Stockholders scheduled to be held on August 30, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
to the information contained in the sections captioned "Voting Securities and
Principal Holders" and "Compensation and Benefits--Certain Transactions" of
the Proxy Statement for the Company's Annual Meeting of Stockholders
scheduled to be held on August 30, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
to the information contained in the section captioned "Compensation and
Benefits" of the Proxy Statement for the Company's Annual Meeting of
Stockholders scheduled to be held on August 30, 1996.
-38-
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income--Years ended March 31, 1996,
1995 and 1994
Consolidated Balance Sheets--March 31, 1996 and 1995
Consolidated Statements of Cash Flows--Years ended March 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity--Years ended March
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is included in the Consolidated Financial Statements or notes
thereto.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
The following exhibits are filed with this report:
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
3.1 Restated Articles of Incorporation of Registrant
3.2 Restated Bylaws of Registrant
EXHIBIT NO. 10: MATERIAL CONTRACTS
EXECUTIVE COMPENSATION PLANS AND AGREEMENTS
10.1 Incentive Stock Option Plan
10.2 1988 Nonqualified Stock Option Plan
10.3 1993 Stock Option Plan
10.4 Amendment to 1993 Stock Option Plan
10.5 Directors Stock Option Plan
10.6 1996 Employee Stock Purchase Plan
10.7 Employment Agreement and Nondisclosure Agreement dated April 17,
1989 between Registrant and Douglass S. Anderson
10.8 Employment Agreement and Nondisclosure Agreement dated July 6,
1989 between Registrant and Jose S. David
10.9 Employment Agreement and Nondisclosure Agreement dated October 2,
1990 between Registrant and Robert L. Richmond
10.10 Employment Agreement and Nondisclosure Agreement dated October 2,
1990 between Registrant and Robert C. Greco
-39-
<PAGE>
10.11 1995/1996 Incentive Plan for Robert L. Richmond
10.12 1995 Incentive Plan for Robert C. Greco
10.13 1995 Incentive Plan for Jose S. David
10.14 1996 Incentive Plan for Robert C. Greco
10.15 1996 Incentive Plan for Jose S. David
10.16 1996 Incentive Plan for Douglass S. Anderson
10.17 Split Dollar Agreement/Assignment dated as of April 11, 1994,
between Registrant and Robert L. Richmond
OTHER MATERIAL CONTRACTS
10.18 Loan Agreement dated as of September 30, 1995, between Registrant
and First Interstate Bank of Washington, N.A.
10.19 Office Lease dated January 31, 1991 between Registrant and Martin
Selig, as amended
10.20 Amendment to Office Lease dated April 27, 1994, between Registrant
and Martin Selig
10.21 Amendment to Office Lease dated August 11, 1994, between
Registrant and Martin Selig
10.22 Subordination, Non-Disturbance and Attornment Agreement dated
January 19, 1995, between Registrant and The
Bank of Nova Scotia
10.23 Amended and Restated Buy-Sell Agreement dated August 8, 1994,
among Registrant, Robert L. Richmond and Robert C. Greco
10.24 Volume Purchase Agreement dated September 1, 1993, between
Registrant and Dialogic Corporation (Confidential treatment
requested)
10.25 Patent License Agreement dated March 2, 1990, between Registrant
and Dytel Corporation (Confidential treatment requested)
10.26 Automated Attendant Patent License Agreement between Registrant
and VMX, Inc. (Confidential treatment requested)
10.27 Voice Mail Patent License Agreement between Registrant and VMX,
Inc. (Confidential treatment requested)
10.28 Assignment of Rights Under Patent Application dated October 22,
1990 by Robert L. Richmond and Michael J. Robinson
10.29 Acknowledgment and Assignment of Proprietary Rights dated October
22, 1990 by Robert C. Greco and Michael J. Robinson
EXHIBIT NO. 11: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
11.1 Computation of Earnings Per Share
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
21.1 Subsidiaries of Registrant
EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Ernst & Young LLP
EXHIBIT NO. 24: POWER OF ATTORNEY
24.1 Powers of Attorney
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
-40-
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ACTIVE VOICE CORPORATION
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------
ADDITIONS
DESCRIPTION BALANCE AT (1) (2) DEDUCTIONS: BALANCE AT
BEGINNING CHARGED TO CHARGED TO DESCRIBE END OF
OF PERIOD COSTS OTHER PERIOD
AND EXPENSES ACCOUNTS:
DESCRIBE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $725,000 $586,891 0 $225,891 (A) $1,086,000
Allowance for sales returns 209,000 70,000 0 0 279,000
-------- -------- ---------- -------- ----------
Totals $934,000 $656,891 0 $225,891 $1,365,000
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
YEAR ENDED MARCH 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $445,000 $490,249 0 $210,249 (A) $ 725,000
Allowance for sales returns 280,000 0 0 71,000 (B) 209,000
-------- -------- ---------- -------- ----------
Totals $725,000 $490,249 0 $281,249 $ 934,000
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
YEAR ENDED MARCH 31, 1995
Deducted from asset accounts:
Allowance for doubtful returns $285,000 $458,845 0 $298,845 (A) $ 445,000
Allowance for sales returns 280,000 0 0 0 280,000
-------- -------- ---------- -------- ----------
Totals 565,000 $458,845 0 $298,845 $ 725,000
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
</TABLE>
(A) Uncollectible accounts written off, net of recoveries
(B) Reduction of estimated future sales returns
-41-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Seattle, State of Washington, on June 27, 1996.
ACTIVE VOICE CORPORATION
By /s/ Jose S. David
-------------------------
Jose S. David
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Robert L. Richmond and Jose S. David, and each of them severally,
his true and lawful attorneys-in-fact and agents, with full power to act
without the other and with full power of substitution and resubstitution, to
execute in his name and on his behalf, individually and in each capacity
stated below, any and all amendments and supplements to this Report, and any
and all other instruments necessary or incidental in connection herewith, and
to file the same with the Commission.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert L. Richmond Chief Executive Officer and June 27, 1996
- ------------------------ Chairman of the Board
Robert L. Richmond Principal Executive Officer
/s/ Robert C. Greco Vice President--Product June 27, 1996
- ------------------------ Development, Secretary,
Robert C. Greco Treasurer and Director
/s/ Jose S. David Chief Financial Officer June 27, 1996
- ------------------------ (Principal Financial and
Jose S. David Accounting Officer)
/s/ Tom A. Alberg Director June 27, 1996
- ------------------------
Tom A. Alberg
/s/ Harold H. Kawaguchi Director June 27, 1996
- ------------------------
Harold H. Kawaguchi
-42-
<PAGE>
APPENDIX 1
Repartee Configuration:
The diagram illustrates the configuration of Repartee. Repartee is a
dedicated PC running the Company's software with circuit cards
that connect it to the telephone switch. This in turn is linked to all the
phone extensions in the company. Calls come through the
outside network into the telephone system and are answered by our
autoattendant. The call is then routed to the given telephone
extension, and if the call is not answered, it is returned to Repartee. Repartee
then offers a greeting in the called party's voice.
APPENDIX 2
TeLANophy Configuration:
The diagram illustrates the configuration of TeLANophy. TeLANophy's
configuration is similar to Repartee's configuration. It is a
dedicated PC running software with circuit cards that connect it to the
telephone switch. The difference is that there is a local area
network (LAN) card in the Repartee. This makes the features of the call
processor now available to every desktop PC on the LAN. The
dashed lines in the configuration show that each desktop is now connected to
its own phone since both lines of communication, the LAN
and the phone lines, are in the call processor.
-43-
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
PAGE
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
3.1 Restated Articles of Incorporation of Registrant
(incorporated by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
3.2 Restated Bylaws of Registrant (incorporated by
reference from Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
EXHIBIT NO. 10: MATERIAL CONTRACTS
EXECUTIVE COMPENSATION PLANS AND AGREEMENTS
10.1 Incentive Stock Option Plan (incorporated by
reference from Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
10.2 1988 Nonqualified Stock Option Plan (incorporated by
reference from Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
10.3 1993 Stock Option Plan (incorporated by reference
from Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on October 29, 1993
(File No. 33-71024))
10.4 Amendment to 1993 Stock Option Plan (incorporated by
reference from Exhibit 10. to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter
ended December 31, 1995 (File No. 0-22804))
10.5 Directors Stock Option Plan (incorporated by
reference from Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
10.6 1996 Employee Stock Purchase Plan
10.7 Employment Agreement and Nondisclosure Agreement
dated April 17, 1989 between Registrant and Douglass
S. Anderson
10.8 Employment Agreement and Nondisclosure Agreement
dated July 6, 1989 between Registrant and Jose S.
David (incorporated by reference from Exhibit 10.15
to the Registrant's Registration Statement on
Form S-1 filed with the Securities and Exchange
Commission on October 29, 1993 (File No. 33-71024))
10.9 Employment Agreement and Nondisclosure Agreement
dated October 2, 1990 between Registrant and Robert
L. Richmond (incorporated by reference from
Exhibit 10.16 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on October 29, 1993
(File No. 33-71024))
<PAGE>
SEQUENTIALLY
NUMBERED
PAGE
10.10 Employment Agreement and Nondisclosure Agreement
dated October 2, 1990 between Registrant and Robert
C. Greco (incorporated by reference from
Exhibit 10.17 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on October 29, 1993
(File No. 33-71024))
10.11 1995/1996 Incentive Plan for Robert L. Richmond
(incorporated by reference from Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1995 (File No. 0-22804))
10.12 1995 Incentive Plan for Robert C. Greco
(incorporated by reference from Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1995 (File No. 0-22804))
10.13 1995 Incentive Plan for Jose S. David (incorporated
by reference from Exhibit 10.16 to the Registrant's
Annual Report on Form 10-K for its fiscal year ended
March 31, 1995 (File No. 0-22804))
10.14 1996 Incentive Plan for Robert C. Greco
10.15 1996 Incentive Plan for Jose S. David
10.16 1996 Incentive Plan for Douglass S. Anderson
10.17 Split Dollar Agreement/Assignment dated as of
April 11, 1994, between Registrant and Robert L.
Richmond (incorporated by reference from
Exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31, 1995
(File No. 0-22804))
OTHER MATERIAL CONTRACTS
10.18 Loan Agreement dated as of September 30, 1995,
between Registrant and First Interstate Bank of
Washington, N.A.
10.19 Office Lease dated January 31, 1991 between
Registrant and Martin Selig, as amended
(incorporated by reference from Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
10.20 Amendment to Office Lease dated April 27, 1994,
between Registrant and Martin Selig (incorporated by
reference from Exhibit 10.21 to the Registrant's
Annual Report on Form 10-K for its fiscal year ended
March 31, 1995 (File No. 0-22804))
10.21 Amendment to Office Lease dated August 11, 1994,
between Registrant and Martin Selig (incorporated by
reference from Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K for its fiscal year ended
March 31, 1995 (File No. 0-22804))
10.22 Subordination, Non-Disturbance and Attornment
Agreement dated January 19, 1995, between Registrant
and The Bank of Nova Scotia (incorporated by
reference from Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for its fiscal year ended
March 31, 1995 (File No. 0-22804))
<PAGE>
SEQUENTIALLY
NUMBERED
PAGE
10.23 Amended and Restated Buy-Sell Agreement dated
August 8, 1994, among Registrant, Robert L. Richmond
and Robert C. Greco (incorporated by reference from
the Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on
November 14, 1994 (File No. 0-22804))
10.24 Volume Purchase Agreement dated September 1, 1993
between Registrant and Dialogic Corporation
(Confidential treatment granted) (incorporated by
reference from Exhibit 10.8 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on
December 2, 1993 (File No. 33-71024))
10.25 Patent License Agreement dated March 2,1990 between
Registrant and Dytel Corporation (Confidential
treatment granted) (incorporated by reference from
Exhibit 10.9 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
December 2, 1993 (File No. 33-71024))
10.26 Automated Attendant Patent License Agreement between
Registrant and VMX, Inc. (Confidential treatment
granted) (incorporated by reference from
Exhibit 10.10 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
December 2, 1993 (File No. 33-71024))
10.27 Voice Mail Patent License Agreement between
Registrant and VMX, Inc. (Confidential treatment
granted) (incorporated by reference from
Exhibit 10.11 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
December 2, 1993 (File No. 33-71024))
10.28 Assignment of Rights Under Patent Application dated
October 22, 1990 by Robert L. Richmond and Michael
J. Robinson (incorporated by reference from
Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on October 29, 1993
(File No. 33-71024))
10.29 Acknowledgment and Assignment of Proprietary Rights
dated October 22, 1990 by Robert C. Greco and
Michael J. Robinson (incorporated by reference from
Exhibit 10.13 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission on October 29, 1993
(File No. 33-71024))
<PAGE>
SEQUENTIALLY
NUMBERED
PAGE
EXHIBIT NO. 11: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
11.1 Computation of Earnings Per Share
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
21.1 Subsidiaries of Registrant (incorporated by
reference from Exhibit 21.1 to the Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Ernst & Young LLP
EXHIBIT NO. 24: POWER OF ATTORNEY
24.1 Powers of Attorney (included on signature pages)
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, entered into this 17th day of April, 1989 by and between Active
Voice, Inc., a Washington corporation (hereinafter "Employer") and Douglas
Anderson (hereinafter "Employee"). The terms of this Employment Agreement are
set out below as agreed upon between the parties hereto.
Therefore, it is agreed as follows:
1. EMPLOYMENT AND TITLE. The Employer hereby employs the Employee, and the
Employee hereby accepts employment, upon the terms and conditions hereinafter
set forth.
2. TERM. This Agreement shall remain in effect for an initial term of one
year, and shall be automatically renewed for succeeding terms of one year,
unless terminated pursuant to Paragraph 10 hereof. During the term of this
Agreement, Employee shall devote his full time and attention and his best
efforts to the conduct of business of the Employer. Full time shall be
defined as at least forty (40) hours per week.
3. COMPENSATION. For all services rendered by the Employee under this
Agreement, the Employer shall pay the Employee a salary of $53,000.00 per
year. The compensation paid to the Employee, including commissions,
incentives, or other benefits, may be increased by the President. Any such
additional compensation must be agreed to in writing.
4. DUTIES. The Employee will perform all National Sales Manager duties
services as requested by the Employer.
5. EXPENSES. Subject to the written consent of the Employer, the Employee
is authorized to incur reasonable expenses for promoting the business of the
Employer, including expenses for entertainment, travel, and similar items.
The written consent of the Employer shall not be required with regard to
incidental expenses of a minor nature incurred by the Employee in the course
of his duties for the Employer, in which case oral consent shall be
sufficient. The Employer will reimburse the Employee for all such expenses
upon the presentation by the Employee from time to time of an itemized
account of such expenditures.
6. DISCLOSURE OF INFORMATION. As a condition of employment, the Employee
agrees to sign and be governed by the Nondisclosure Agreement attached hereto
as Attachment A.
7. RESTRICTIVE COVENANT. During the term of his employment and for a
period of sixty (60) days after the termination of his employment under this
Agreement, the Employee will not, without written consent of the Employer,
directly or in-directly own, manage, operate, control, be employed by,
participate in, or be connected with the ownership, management, operation, or
control of any business which is engaged in the
<PAGE>
business of producing/marketing substantially similar products to those of
the Employer at the time of termination. Furthermore, and during such period,
the Employee will not either individually or through other employment,
solicit, contact or accept orders on behalf of businesses producing/marketing
substantially similar products to that of the Employer and/or any of the
Employer's customers.
In the event of an actual or threatened breach by the Employee of the
provisions of this paragraph, the Employer shall be entitled to an injunction
restraining the Employee from engaging in any such violation. Nothing herein
stated shall be construed as prohibiting the Employer for pursuing other
remedies available to the Employer for such breach or threatened breach,
including the recovery of damages from the Employee.
8. INVENTIONS. Ownership of any designs, inventions or products developed
or invented by the Employee during the term of this Agreement, and which
relate to the business of the Employer, shall be the property of the Employer.
9. MEDICAL AND DENTAL INSURANCE. The Employee shall be entitled to
coverage under the Employer's group medical and dental insurance policies. To
the extent that the Employee is not covered under such policies, the Employer
shall pay an equivalent amount to a plan selected by the Employee.
10. TERMINATION. This Agreement shall be terminated upon the occurrence of
any one of the following events:
10.1 the death of Employee;
10.2 mutual agreement to termination in writing between Employer and
Employee.
10.3 forty-five (45) days' written notice of termination given by
Employee to Employer;
10.4 the determination by Employer's President to terminate Employee,
with or without cause, giving Employee not less than thirty (30) days'
written notice if without cause.
In event of such a termination, Employee shall continue to render services to
Employer and shall be paid his regular compensation up to the date of
termination.
11. VENUE AND JURISDICTION. This Agreement has been entered into for
employment in the State of Washington, and shall be governed by the laws of
the State of Washington. In the event that any dispute arises between the
parties, the parties agree that venue and jurisdiction shall be placed with
and in King County, Washington and that the prevailing party shall be
entitled costs and actual attorneys' fees, including those incurred on appeal.
12. WAIVER OF BREACH. The waiver by the Employer of a breach of any
provision of the Agreement by the Employee shall not operate or be construed
as a waiver of any subsequent breach by the Employee.
<PAGE>
13. SEVERABILITY. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
14. NOTICES. Any demand, request or notice which either party hereto
desires or may be required to make or deliver to the other shall be in
writing and shall be deemed delivered when personally delivered or three days
after being deposited in the United States mail, postage prepaid, in
registered or certified form, if addressed 1) in the case of Employee, to
his/her last known address, and 2) in the case of the Employer, to its
principal place of business.
15. SPECIFIC PERFORMANCE. The parties declare that it may be impossible to
measure in money the damages which will accrue to a party hereto by reason of
the failure to perform any of the obligations under this Agreement. If either
party hereto shall institute any action or proceeding to specifically enforce
the provisions of this Agreement, the party against whom such action or
proceeding is brought hereby waives the claim or defense of any adequate
remedy at law.
16. BINDING EFFECT. This Agreement shall bind the parties hereto and their
heirs, executors, administrators, successors and assigns.
17. COMPLETE AGREEMENT. This Agreement contains the entire agreement
between the parties relating to the subject matter hereof and no modification
of this agreement shall be valid unless made in writing and signed by the
parties hereto.
EMPLOYER
--------
ACTIVE VOICE, INC.
BY /s/ Robert L. Richmond
-------------------------------
President
April 24, 1989
---------------------------------
Date
EMPLOYEE
--------
/s/ Douglass S. Anderson
---------------------------------
April 19, 1989
---------------------------------
Date
<PAGE>
NONDISCLOSURE AGREEMENT
-----------------------
Active Voice, Inc.
Seattle, Washington
Gentlemen:
The following confirms an agreement between me and Active Voice, Inc., a
Washington corporation (the "Company"), which is a material part of the
consideration for my employment by the Company.
1. I recognize that the Company is engaged in a continuous program of
research, development and production respecting its business, present and
future, including fields generally related to its business and that the
Company possesses and will continue to possess information that has been
created, discovered, developed or otherwise become known to the Company
(including without limitation information created by, discovered or developed
by, or made known to, me during the period of or arising out of my employment
at the Company) and/or in which property rights have been assigned or
otherwise conveyed to the Company, which information has commercial value in
the business in which the Company is engaged. All of the aforementioned
information is hereinafter called "Proprietary Information." By way of
illustration, but not limitation, Proprietary Information includes trade
secrets, processes, formulas, designs, inventions, techniques, new products,
marketing plans, tactics, strategies, forecasts, customer and supplier lists,
business plans and other information valuable to the running of the Company's
business.
2. I understand that my employment created a relationship of confidence
and trust between me and the company with respect to any information:
(i) applicable to the business of the Company; or
(ii) applicable to the business of any client or customer of the
Company, which may be known to me by the Company or by any client or customer
of the Company, or learned by me during the period of my employment.
3. In consideration of the compensation received by me from the Company
from time to time, I hereby agree as follows:
(a) All Proprietary Information shall be the sole property of the
Company and its assigns, and the Company and its assigns shall be the sole
owner of all patents, copyrights and other rights in connection therewith. I
hereby assign to the company any rights I may have or acquire in such
Proprietary Information. At all times, both during my employment by the
Company and after my termination, I will not disclose but will keep in
confidence and trust all Proprietary Information or anything relating to it
without the written consent of the Company, except as may be necessary in
the ordinary course of performing my duties to the Company.
<PAGE>
(b) All documents, records, apparatus, equipment and other physical
property, whether or not pertaining to Proprietary Information, furnished to
me by the Company or produced by myself or others relating to the Company's
business shall be and remain the sole property of the Company and shall be
returned to it immediately as and when requested by the Company.
4. This Agreement shall be effective as of the first day of my employment
by the Company.
5. This Agreement shall be binding upon me, my heirs, executors, assigns,
and administrators and shall inure to the benefit of the Company, its
successors and assigns.
6. The parties acknowledge that the provisions of this Agreement create
rights and remedies which are in addition to those rights and remedies the
Company may have under the Uniform Trade Secrets Act, Chapter 19.108 of
the Revised Code of Washington.
Dated: April 19, 1989
----------------------
Signed: /s/ Douglass S. Anderson
----------------------
Accepted and Agreed to:
ACTIVE VOICE, INC.
BY /s/ ROBERT L. RICHMOND
----------------------
<PAGE>
Incentive Plan for Robert C. Greco
for Fiscal Year Ending March 31, 1996
1. This plan applies to the fiscal year ending 3/31/96. This plan is intended
to compensate the Vice President of Product Development for his hard work in
helping the company achieve both development goals and technical alliances with
partners in the retail channel -- both of which are critical to the future of
Active Voice.
This compensation is paid according to the terms and conditions of the
Employment Agreement between Robert Greco and Active Voice, Inc. Should this
additional compensation agreement in any manner be inconsistent with the
Employment Agreement, the Employment Agreement shall prevail.
2. Salary will be increased for FY96 by 5% over FY95 to $9,000/mo as of April
1, 1995.
3. Bonus for the Vice President of Development are as follows:
40% of average salary for FY95 to be paid after the end of the fiscal
year if 80% of all development goals reached. Between 80% and 50% of
goals met, the bonus will be reduced simultaneously and proportionately
from 20% to 0% of salary.
An additional 10% of salary for alliance goal 0. 40% for alliance goal
1, 40% for alliance goal 2 and 20% for structure goal 1.
Maximum upside: 150% of salary, or $161,000, for a total comp of $270,000.
Specific objectives, both for alliances, structure and development goals, can
be changed with agreement of the President if strongly affected by changing
market conditions or financial strategies not under the control of Development.
4. Bonuses are dependent upon:
Expenses for his department being less than or equal to the budget,
unless through written agreement with the President. Note: meeting the
budget also includes having less than or equal to the planned number of
heads in the last month of the year.
5. If the company's earnings goals are difficult to achieve, the board may, at
their discretion, substitute ISO stock options for cash bonus dollars at a
ratio of not greater than 2 options per $10.
6. Upon completion of the structure goals and alliance goals 0 and 2 attached,
Mr. Greco is then entitled to and encouraged to take a sabbatical of 3 months
duration, fully paid. However the President must agree in writing that the
various duties of Mr. Greco will be covered appropriately in his absence.
<PAGE>
Agreed to by compensation committee:
/s/ H. Kawaguchi September 6, 1995
- ----------------------- -------------------
Director H. Kawaguchi Date
/s/ Tom Alberg January 18, 1996
- ----------------------- -------------------
Director Tom Alberg Date
<PAGE>
Additional Goals for Robert Greco Compensation Agreement
As of August, 1995
ALLIANCE GOALS
0. Demonstrations of our "future of voicemail in the home, office and
inbetween" by Bob to the following people during FY 1996: Head of telephony for
Lotus, head of telephony development for Novell, head of telephony
development for Microsoft, head of product development for Delrina, head of
product development for McCaw Wireless Division, head of telephony for Intel
and three other modem manufacturers each with at least 5% of the fax/modem
market, head of email for Compuserve or equivalent. As for timing, Compuserve
or equivalent must be demo'd to by October 1995, and the rest can be done in
order to meet Alliance Goal 1 below.
1. A technical commitment within FY 96 from at least one alliance partner to
demonstrate the use of ViewMail or ViewCall either within their product or
using hooks built into their product. The commitment must be significant first
in that their people will plan to spend at least 6 manmonths helping us write
software or writing software themselves; and second, the partner will announce
the alliance in a press release featuring us and them exclusively. Alliance
partners for the purpose of this paragraph would be as follows: Novell, Lotus
(which includes CCMail), Delrina, and Microsoft and Compuserve (or equivalent).
If the partner is Novell, a press release regarding an NLM by us would be
sufficient. For Microsoft, a press release regarding an icon that they will OEM
for ViewCall or ViewMail would be sufficient.
2. An acquisition of a company or its software in the field of home or retail
voicemail that complements or replaces currently planned work by January 1996
with the following provisos: it must be clear that this acquisition will
contribute to EPS of the company by one year from the date of acquisition; and
a preliminary milestone that must be met is that we must make an offer to them
by October 31, 1995.
STRUCTURE GOALS:
1. Announce with the VP of Sales and Marketing, by September 30, 1995, a
structure for Product Management that results in harmony between Marketing and
Development on the selection and development of new products. The results by
the end of the fiscal year must include: one amazing new plain old voicemail
feature; revenue per product predictions for all products; and a two year
product plan.
<PAGE>
12/6/95
To: Bard
From: Bob G.
re: Proposed Changes to Compensation Agreement:
1st page -- 1 minor change:
5. If the company's earnings goals ..... 2 options per $10. Vesting of these
substitute options will be immediate upon grant.
3rd page
Modifications as to not pre-assume the company strategy which is crystalizing
now with our new VP Doug and new structure. this makes goals more realistic.
Additional Goal for Robert Greco Compensation Agreement
As of August, 1995
ALLIANCE GOALS
0. Demonstrations of the "Active Voice future vision and product strategy" by
Bob to ten potential alliance partners during FY1996. These partners should
include: Head of telephony for Lotus, head of telephony development for Novell,
head of product development for McCaw Wireless Division, head of telephony for
Intel and three other modem manufacturers each with at least 5% of the
fax/modem market, head of email for Compuserve or equivalent. Other potential
alliance partner demonstrations will contribute to this goal subject to
approval by the President. As for timing, Compuserve or equivalent must be
demo'd to by October 1995, and the rest can be done in order to meet Alliance
Goal 1 below.
1. A technical commitment within FY96 from at least one alliance partner to
demonstrate the integration of an Active Voice product within their product or
by using hooks built into their product. The commitment must be significant
first in that their people will plan to spend at least 6 personmonths helping
us write software or writing software themselves; and second, the partner will
announce the alliance in a press release featuring us and them exclusively.
Alliance partners for the purpose of this paragraph would be as follows:
Novell, Lotus (which includes cc:Mail), Delrina, Microsoft and Compuserve
(or equivalent). If the partner is Novell, a press release regarding an NLM by
us would be sufficient. For Microsoft, a press release regarding an icon that
they will OEM for ViewCall or ViewMail would be sufficient. Other alliance
partners may qualify subject to approval by the President.
2. An acquisition or investment with option to buy of a company or its
software in the field of home or retail voicemail or any other field which is
of strategic importance to Active Voice, that complements or replaces currently
planned work by July 1996 with the following provisos: it must be clear that
this acquisition will fit the near and long term financial objectives including
increased EPS; and a preliminary milestone that must be met is that we must
make an offer to them by March 31st, 1996.
STRUCTURE GOALS:
1. Announce with the VP of Sales and Marketing, by September 30, 1995, a
structure for Product Management that results in harmony between Marketing and
Development on the selection and development of new products. The results by
the end of the fiscal year must include: one amazing new plain old voicemail
feature (determined by opinion of the President) released or scheduled to be
released in 1996; revenue per product predictions for all products; and a two
year product plan.
APPROVAL OF ALL HIGHLIGHTED ITEMS
/s/ H. Kawaguchi January 12, 1996
/s/ Tom Alberg January 18, 1996
<PAGE>
Incentive Plan for CFO Jose David
For Fiscal Year Ending March 31, 1996
8/95
This plan applies to the fiscal year ending 3/31/95. It is intended to
incentivize Jose to control and manage the financial strategies of Active
Voice.
This compensation is paid according to the terms and conditions of the
Employment Agreement between Jose David and Active Voice, Inc. Should this
additional compensation agreement in any manner be inconsistent with the
Employment Agreement, the Employment Agreement shall prevail.
1. SALARY
Jose's recent salary history is: raise on 4/92 to $66,528 per year; raise on
4/1/93 was 7% to $71,185 per year plus a bonus of $31,666 for completion of
the IPO and certain goals as well as 1) profit sharing of $12,909 and 2)
5,000 option shares.
His base salary was raised by 5% to $74,744 per year as of 4/1/94. Bonus for
FY95 was $34K, resulting from various successes on CoGs (Cost of Goods)
reduction and quality improvements.
With this plan, his salary will be raised by 7% to $80,000. Bonuses will be
available as detailed below for the following objectives:
1. COME UP WITH A YARDSTICK FOR RELIABILITY VERSUS PRICE FOR PURCHASING BY
OCTOBER 31, 1995. With Laura, develop a model that shows how much of an
improvement in reliability in our computers and Dialogic boards is worth in
a measurable reduction in RMAs, support, and travel. (Lost sales would be a
nice additional benefit, but is impossible to measure, unfortunately). This
reliability increase can be achieved with added expense on testing, paying
more CoGs, or better purchasing contracts with vendors. This yardstick will
be used by the company for purchasing tradeoffs.
2. BONUS FOR MARGIN ACHIEVEMENT
FY95 ended with 65% margin. We conservatively forecast a reduction for all of
next year to 63.5%, which we hope to beat. Your efforts will be instrumental
in that, and thus you will be bonused according to what we achieve for all
of FY95, as follows:
At or above 65% $40,000
Between 65 and 63.6 $30,000
Between 63.1 and 63.5 $10,000
Provisos:
- - It's OK to spend capital, and expense, to reach these margin goals, as long
as there is prior written arrangement with the President which will not be
withheld as long as it pays for itself. For example, getting a purchasing
agent for the computers would be acceptable, and recommended.
<PAGE>
- - Margin must be measured the same way as last year (i.e., same allocations)
for the purposes for this paragraph, with one exception: increases in CoGs
for the purposes of increased reliability and/or RAM can be removed before
the calculation.
- - Revenue must at least meet the planned $46.6M and profit the planned $6.3M.
3. CONTROL A/R. For every day less in FY96 than FY95, $2,500 as long as
revenue and profit meet the plan.
4. ADDING ANALYSTS. For each additional national (not regional) analyst that
covers the stock, $5,000. $1,000 per regional.
5. FOR CUTTING OVER TO THE NEW ACCOUNTING SYSTEM BY THE END OF THIRD QUARTER
OF FY96 (means it produces financial reports on time), $20,000 to be spent on
yourself and the members of your department.
NOTE: bonus amounts that exceed $36,380 will be paid as reduced price options
on the non-qualified plan, with price per share reduced by $5, and options to
be vested over one year. Example: if the bonuses add up to $46,380, Jose
would receive $36,380 in cash and $10,000 as 2000 option shares at a price
of $5 less than the current price at that time.
Agreed to by:
/s/ H. KAWAGUCHI 9-6-95
- --------------------------- -------
Director H. Kawaguchi Date
/s/ TOM ALBERG 1/18/96
- --------------------------- -------
Director Tom Alberg Date
<PAGE>
DOUGLASS S. ANDERSON
COMPENSATION FOR FYE MARCH 31, 1996
JUNE 1995
This details the compensation for Douglass S. Anderson as Vice President of
Sales and Marketing for Active Voice for the period of July 1, 1995 through
March 31, 1996, and supercedes all other compensation agreements regarding
this period. This compensation is paid according to the terms and conditions
of the Employment Agreement between Douglass S. Anderson and Active Voice,
Inc. Should this additional compensation agreement in any manner be
inconsistent with the Employment Agreement, the Employment Agreement shall
prevail.
1. SALARY: In your new role as Vice President of Sales and Marketing, your
annual salary shall be increased by 14% to $83,790 per year commencing July
1, 1995. However, management reserves the right to reduce the salary of
employees if cost-cutting circumstances require.
2. COMMISSIONS: As Vice President of Marketing and Sales, you will earn a
commission on the entire revenues of the company. Commissions will be paid
quarterly (for the three quarters remaining in this year), based on beating
the objectives that have been set for the quarter as shown below. The bonus
per quarter is as follows:
Less than 90% of quarterly objective $0
90% $10,000
95% $15,000
100% $22,000
105% $25,000
110% $28,000
120% $34,000
The objectives for this year's quarters are:
Q1 $ 9,968,525
Q2 $10,940,910
Q3 $11,857,382
Q4 $12,983,003
3. PERCENTAGES GREATER THAN THOSE ABOVE: for each 5% greater than the 120% of
objective, we will pay an additional $10,000 as long as the immediately
following quarter also is at least 120% of the objective. So, for example, if
in two quarters you beat the objective by 130% then 120%, the bonus for the
first of those will be $54,000 and the second will be $34,000.
4. MERGER OR ACQUISITION. If the company merges or acquires another, it is
our intention that, if you manage the sales activity of the new entity, you
will earn a similar commission on its revenue. However, the amount and
details will have to be worked out by the CEO of Active Voice.
<PAGE>
5. MARGIN BONUS: We expect that you will set pricing to maintain margins. To
incentivize you in this area, we will set aside the following bonuses. (This
year ended with 65% margin. We conservatively forecast a reduction for all of
next year of 83.5%, which we hope to beat.)
At or above 65% $40,000
Between 6.5 and 63.5 $30,000
Between 63.5 and 62.5 $10,000
5.1 BONUS FOR BEATING AVT AND CENTIGRAM. If you beat both AVT's and
Centigram's revenue growth rate for our fiscal year 96 (compare against their
comparable four quarters) we will pay you an additional $10,000.
5.2 STOCK OPTIONS. In order to incentivize you for the long-term growth of
the company's stock, which entails hard work and making the correct, even if
difficult, decisions, we hereby award a stock option of 35,000 shares at an
effective price of the current price, to be vested evenly over 5 years
starting July 1, 1995. The option will be part of our current nonqualified
stock option plan, unless it is possible to make it part of the qualified
option plan without creating an expense to the company.
6. BENEFITS.
a) 9 paid holidays per year plus your birthday.
b) Four weeks paid vacation.
c) Full coverage on a medical and dental plan (Group Health family coverage
or equivalent amount paid to the plan of your choice).
d) Profit sharing: as with all employees, profit sharing will be based on
the cash portion of your compensation, not the options. Note: the board
reserves the right to limit profit sharing of executives to an absolute
amount of $20,000 but has not elected to do so as yet.
7. APPROVAL: This compensation plan is subject to final approval by the Board
of Directors Compensation Committee.
The company very much appreciates the hard work and talent you provide and
the compensation committee is pleased to offer this plan to you.
Agreed to by: Agreed to by:
Robert L. Richmond, CEO Douglass S. Anderson, Employee
/s/ ROBERT L. RICHMOND Date: 7/5/95 /s/ DOUGLASS S. ANDERSON Date: 7/8/95
- ---------------------- ------ ------------------------ ------
Approved by Board of Directors Compensation Committee:
Harold Kawaguchi Tom Alberg
/s/ Harold Kanaguchi Date: 7/5/95 Tom Alberg Date: 7/5/95
- -------------------- ------ ------------------------- ------
<PAGE>
AMENDED AND RESTATED
LOAN AGREEMENT
[With Arbitration Provisions]
This Amended and Restate Loan Agreement is made and executed as of September
30, 1995, by and between ACTIVE VOICE CORPORATION, a Washington corporation,
referred to in this Agreement as "Borrower", and FIRST INTERSTATE BANK OF
WASHINGTON, N.A., a national banking association, referred to in this
Agreement as "Bank". This Agreement replaces and supersedes all prior loan
agreements between Borrower and Bank, as of the date hereof.
In consideration of the mutual promises contained herein, the parties agree
as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have the
meanings indicated which shall apply both to the singular and the plural of
the terms defined:
"ADJUSTED LIBOR RATE" has the meaning set forth in paragraph 2.3.2 hereof.
"ADVANCE" means each disbursement of funds to Borrower pursuant to the
Line.
"AGREEMENT" means this Amended and Restated Loan Agreement, as it may be
extended, renewed or modified from time to time.
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which Bank is closed for business.
"EURO-DOLLAR BUSINESS DAY" means any Business Day on which commercial
banks are open for international business (including in U.S. Dollar deposits)
in London, England.
"EVENT OF DEFAULT" means any of the events described in paragraph 8.1
hereof.
"INTEREST PERIOD" for any Advance under the Line has the meaning set forth
in paragraph 2.3.2 hereof.
"LINE" means the revolving line of credit extended to Borrower pursuant to
Section 2 hereof, and any extension renewals and modifications thereof.
"LINE LIMIT" means the maximum aggregate of Advances allowable under the
Line, as described in paragraph 2.1 hereof.
"LOANS" means, individually and collectively, all indebtedness now or
hereafter owing by Borrower to Bank, whether now existing or hereafter
arising, direct or indirect, absolute or contingent, including but not
limited to Advances under the Line, together with interest thereon.
<PAGE>
"MASTER PROMISSORY NOTE" means the master promissory note evidencing the
Line, in substantially the form of Exhibit A hereto, and any extensions,
renewals and modifications thereof.
"PRIME RATE" means the index rate published or publicly announced by Bank
from time to time as its "Prime Rate," which rate need not be the lowest rate
then available from Bank.
2. REVOLVING LINE OF CREDIT.
2.1 ADVANCES/LINE LIMIT.
2.1.1. Subject to all of the terms and conditions of this Agreement, and
provided no Event of Default or event which with notice or passage of time or
both would be an Event of Default has occurred and is continuing, Bank agrees
to make such Advances to Borrower as Borrower may from time to time request
during the period from the date hereof to September 30, 1996; PROVIDED, that
in no event shall Bank be obligated to make Advances to Borrower which, in
the aggregate, would exceed Ten million dollars ($10,000,000.00) (the "Line
Limit"). Within the limits of the Line Limit and subject to the other terms
and conditions hereof, Borrower may borrow, repay, prepay and reborrow from
time to time.
2.1.2 Bank shall have no obligation to make any Advance after the
expiration date of the Line unless the term of the Line is extended by Bank,
in writing, at its sole option; however, any Advance actually made by Bank to
Borrower after such date or in excess of the Line Limit or any extension or
renewal of the Line shall be entitled to all of the benefits of this
Agreement, including but not limited to the Events of Default and related
remedies set forth herein.
2.1.3 Any request for an Advance or extension of credit under the Line
shall be deemed a representation and warranty by Borrower that all of the
conditions precedent of Section 4 are satisfied as of the date of the request.
2.2 PURPOSE. Proceeds of Advances pursuant to the Line are to be used solely
for Borrower's general operating purposes.
2.3 INTEREST.
2.3.1 OPTIONS. Borrower may choose one of the following interest rate
options for any Advance under the Line, as described and defined more fully
in this paragraph 2.3.
(a) PRIME RATE OPTION. One or more Advances may bear interest at a
per annum rate equal to Bank's Prime Rate, with adjustments to the interest
rate made concurrently with and on the same day as each change in the Prime
Rate. Interest is calculated on the basis of a year of 360 days and the
actual number of days elapsed.
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(b) ADJUSTED LIBOR OPTION. One or more Advances may bear interest at
a per annum rate equal to 150 basis points in excess of the Adjusted LIBOR
Rate for the Interest Period selected by Borrower (1, 2, 3 or 6 months) for
such Advance, subject to availability of the LIBOR market to Bank. Advances
under this option shall be in a minimum principal amount of $250,000 and
greater amounts in increments of $100,000 and cannot be prepaid. Interest is
calculated on the basis of a year of 360 days and the actual number of days
elapsed.
2.3.2 INTEREST RATE CALCULATION METHODS; DEFINITIONS. Interest under the
various interest rate options, set forth above, will be calculated as follows:
(a) The "ADJUSTED LIBOR RATE" applicable to any Interest Period
means a rate per annum determined pursuant to the following formula:
[LIBOR]*
------------
ALR = [1.00 - ERP]
ALR = Adjusted LIBOR Rate
LIBOR = London Interbank Offered Reference Rate
ERP = Euro-Dollar Reserve Percentage
- ------------------
* The amount in brackets being rounded upwards, if necessary, to the next
higher 1/16 of 1%.
(i) The "LONDON INTERBANK OFFERED REFERENCE RATE" or "LIBOR"
applicable to any Interest Period means the per annum rate of interest
determined by Bank to be the rate at which deposits in dollars are offered in
the London Interbank market as quoted by Telerate, Inc. or some similar rate
quotation service to which Bank or one of its affiliates subscribes between
6:30 and 7:30 a.m., Seattle time, two (2) Euro-Dollar Business Days before
the first day of such Interest Period for a period of time comparable to such
Interest Period.
(ii) "EURO-DOLLAR RESERVE PERCENTAGE" means, for any day, that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank
of the Federal Reserve System in San Francisco in respect of "Eurocurrency
liabilities" (or in respect of any other category of liabilities which
includes deposits by reference to which the interest rate on Euro-Dollar
Advances is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to
United States residents). The Adjusted LIBOR Rate may be adjusted on and as
of the effective date of any change in the Euro-Dollar Reserve Percentage.
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(iii) In the event that the use of the procedure described
above for determination of the Adjusted LIBOR Rate is precluded for any reason,
including but not limited to format changes or cessation of publication by
Telerate, Inc. or other permitted rate quotation service of such rate for
more than one (1) Euro-Dollar Business Day, Bank will use as the Adjusted
LIBOR Rate the rate determined by Bank to be the arithmetic average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the rates quoted by
two or more New York dealers in Euro-Dollar funds of recognized standing
determined by Bank to most closely approximate the Telerate quote specified
for determination of such rate as set forth above for deposits having
a maturity comparable to the applicable Interest Period and in an amount
approximately equal to the Advance to be made by Bank.
(b) "INTEREST PERIOD" means, with respect to each Advance requested
by Borrower bearing interest based on the Adjusted LIBOR Rate, the period
commencing on the date of such Advance and ending one (1), two (2) or three
(3) or six (6) months thereafter, as Borrower may elect at the time the
Advance is requested, during which period the Advance shall bear interest at
the Adjusted LIBOR Rate applicable to the period for the Advance as chosen by
Borrower. The first day of any such Interest Period shall be either (i) the
date funds are initially advanced, or (ii) for an Advance already outstanding
the last day of the next preceding Interest Period applicable to such Advance
or, if applicable, the last day at which interest accrued at the Prime Rate;
and the last day shall be the earlier of the following:
(A) the maturity date of the Master Promissory Note
evidencing the Line, or
(B) the date which is one (1), two (2), three (3) or six (6)
months thereafter, as Borrower may elect in the applicable Advance request or
interest rate election; provided that if such date is not a Euro-Dollar
Business Day, the Interest Period shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day; and provided further, that if the
Interest Period begins on the last Euro-Dollar Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) the Interest Period shall
end on the day which is the last Euro-Dollar Business Day of the applicable
calendar month.
2.3.3 ADVANCE REQUESTS; RATE ELECTIONS. In addition to the terms and
conditions of the Master Promissory Note, the following terms and conditions
will apply to any Advances unless modified in writing by the parties hereto:
(a) Advances hereunder and elections of or changes to interest
rates and selections of Interest Periods may be telephonically or otherwise
requested by a representative of Borrower so designated by Borrower;
provided, however, that Borrower agrees to provide to Bank, at Bank's option
and request, not more than five (5) Business
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Days after any verbal notice, a written verification of such Advance request,
rate election and/or Interest Period. Failure of Borrower to provide such
written verification shall not invalidate Bank's authority to rely on verbal
notice or instruction, but shall entitle Bank, in its sole discretion, to
refuse to allow additional Advances hereunder. Bank may rely on any oral or
written request, specification or direction from any person authorized by
Borrower to request an Advance pursuant to this paragraph, which Bank
believes to be genuine and shall be fully protected in doing so without any
requirement to make further inquiry.
(b) Each Advance request, whether written or verbal, shall specify
the date of Advance, the amount, the rate calculation method (Prime Rate or
Adjusted LIBOR Rate) and, if applicable, the applicable Interest Period.
(c) Each rate calculation method election applicable to existing
Advances, whether written or verbal, shall specify the date of Advance, the
amount, the rate calculation method (Prime Rate or Adjusted LIBOR Rate), the
specific outstanding Advance(s) to which the election applies and, if
applicable, the last day of the Interest Period of the Advance(s) being
replaced with the new Advance. In the event that Borrower fails to make a rate
calculation method election on or before the end of an Interest Period for
any Advance(s), to take effect immediately following such Interest Period,
such Advance(s) shall, after the expiration of the current Interest Period,
bear interest based on the Prime Rate until repaid or until a new election is
received by Bank.
(d) Borrower may at any time convert some or all of the portion of
the principal outstanding under Line accruing interest at the Prime Rate to
one or more Advance(s) bearing interest based on the Adjusted LIBOR Rate (if
available) so long as such Advances otherwise meet the requirements of
Advances of that type.
(e) Unless otherwise agreed by Bank, Advance requests received by
4:00 p.m. Seattle time, of a Business Day and bearing interest at Prime Rate
will be funded on the same Business Day, and Advance requests received by
10:00 a.m. of a Euro-Dollar Business Day and bearing interest based on the
Adjusted LIBOR Rate will be funded on the second Euro-Dollar Business Day
following the request.
(f) Borrower agrees that each Advance bearing interest based on the
Adjusted LIBOR Rate shall be in a principal amount of not less than two
hundred fifty thousand dollars ($250,000) and greater amounts in increments
of one hundred thousand dollars ($100,000).
(g) Borrower agrees to indemnify and hold Bank harmless from any
costs, expenses or losses of any kind incurred solely because Borrower
requested an Advance which Advance request Borrower later cancels.
(h) No delay, omission or course of dealing will be deemed a waiver
or modification hereof unless agreed to in writing, and shall be effective
only to the extent specifically set forth in writing.
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<PAGE>
2.4 INCREASED COSTS; ILLEGALITY.
2.4.1 If after the date hereof, the adoption or effect of any
applicable law, rule or regulation, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank with any applicable law,
rule or regulation or any request or directive (whether or not having the
force of law) of any such authority, central bank or comparable agency:
(a) shall subject Bank to any tax, duty, fee or other charge with
respect to its Advances bearing interest base don the ADjusted LIBOR Rate, its
notes or its obligations to make such fixed rate loans, or shall change the
basis of taxation of payments to Bank of the principal of or interest on its
fixed rate loans or any other amounts due under this agreement or the Master
Promissory Note (except for changes in the rate of tax on the overall net
income of Bank imposed by the jurisdiction in which Advances Bank's principal
executive office or office through which such Advances are made is located);
or
(b) shall impose, modify or deem applicable any reserve, special
deposit or similar requirement (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal Reserve System,
but excluding any such requirement included in an applicable Reserve
Percentage) or shall impose on Bank or on the United States marker for LIBOR
sources any other condition affecting such fixed rate loans, its notes or
its obligation to make fixed rate loans;
and the result of any of the foregoing is to increase the cost to Bank of
making or maintaining any fixed rate loan hereunder, or to reduce the amount
of any sum received or receivable by bank under the Master Promissory Note
with respect thereto, by an amount deemed by bank to be material, then within
fifteen (15) days after demand by bank to Borrower, Borrower shall pay to
Bank such additional amount or amounts as will compensate Bank for such
increased costs or reduction.
2.4.2 If after the date hereof, Bank shall have determined that the
adoption or effect of any applicable law, rule or regulation regarding
capital adequacy or reserve requirements, or any change therein, or any change
in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation
or administration thereof, or compliance by Bank with any applicable law, rule
or regulation or any request or directive regarding capital adequacy or
reserve requirements (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on Bank's capital as a consequence of its
obligations hereunder to a level below that which Bank could have achieved
but for such effect, adoption, change or compliance (taking into
consideration Bank's policies with respect to capital adequacy) by an amount
deemed by Bank to be material, then from time to time, within fifteen (15)
days after demand by Bank, Borrower shall pay to Bank such additional amount
or amounts as will compensate Bank for such reduction.
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<PAGE>
2.4.3 Bank will promptly notify Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle Bank to
compensation pursuant to this paragraph 2.4 and setting forth the additional
amount or amounts to be paid to it hereunder, which shall be conclusive in
the absence of manifest error. In determining such amount, Bank may use any
reasonable averaging and attribution methods. If Bank demands compensation
under paragraph 2.4.1, Borrower may at any time, upon at least five (5)
Business Days' prior notice to Bank, repay to Bank the full amount of the
then-outstanding fixed rate loans together with accrued interest thereon to
the date of prepayment. Concurrently with repaying such fixed rate loans,
Borrower may borrow from Bank an Advance bearing interest based on the Prime
Rate or other interest rate options available under this Agreement and not
affected by such changes in an amount equal to the aggregate principal amount
of such fixed rate loans, so long as such Advance otherwise meet the
requirements of Advances of that type.
2.4.4 Notwithstanding any other provision of this Agreement, if (a) the
introduction of or any change in or application, interpretation or
administration of any law, rule or regulation shall make it unlawful or
impossible, or any central bank or other governmental authority shall assert
that it is unlawful, for Bank to perform its obligations hereunder to make
advances funded through LIBOR sources or to continue to fund or maintain such
advances hereunder, or (b) if Bank determines that the information required
to compare the effective interest rate is not available through Tolerate,
Inc. or some similar service because deposits in U.S. Dollars (in the
applicable amounts) are not being offered to or by (as the case may be) a
sufficient number of banks in the relevant market for such Interest Period,
or (c) if U.S. Dollars are not being offered to Bank in the London market, or
(d) if the Adjusted LIBOR Rate as determined by Bank will not adequately and
fairly reflect the cost to Bank of maintaining or funding its fixed rate
loans for such Interest Period, then Bank may, be notice to Borrower, suspend
the right of Borrower to elect such rate and, effective at the end of the
then current Interest Period (or sooner, if necessary in the reasonable
opinion of Bank to comply with such law or regulation), convert all such
Advances so that each bears interest based on the Prime Rate. After Bank
gives such notice to Borrower, Borrower may, upon two Business Days' notice,
prepay all of the Advances made by Bank at any time. Any notice by Bank under
this paragraph may be written, telex, telegraphic, telephonic or facsimile
means; any telephone notice shall be confirmed immediately in writing, but
failure to provide such written verification shall not invalidate such
telephonic notice.
2.5 REPAYMENT OF ADVANCES.
2.5.1 Borrower shall pay to Bank on demand, or if no demand is made on
September 30, 1996 the aggregate outstanding principal balance of all
Advances under the Line, together with all unpaid accrued interest and unpaid
fees and changes. Accrued interest on all Advances shall be payable monthly,
as billed. Bank may, from time to time, at its sole option and for such
periods as it may determine, extend the expiration date of the Line or any
outstanding balance thereon, and such sums shall be subject to this
Agreement; provided that if Bank unilaterally extends the expiration date of
the Line,
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Borrower will only be liable for loans fees after the current
expiration date of the Line which have been agreed to by the parties hereto.
2.5.2 If at any time the outstanding amount of the Advances made and
other credit extended by Bank to Borrower under the Line exceeds the Line
Limit, Borrower shall immediately pay Bank such amount as may be necessary to
reduce the outstanding Advances to an amount which is not greater than the
Line Limit.
2.5.3 Prepayment of the principal amount of any Advance accruing interest
based on the Adjusted LIBOR Rate before the end of the applicable Interest
Period will not be allowed.
2.5.4 If any payment date hereunder or under any notes or other
agreement for payment of money or any date on which performance is required
hereunder or under any such agreement occurs on a day other than a Business
Day, such payment shall be made or performance occur on the next succeeding
Business Day; provided, that interest shall continue to accrue on any
outstanding Advances until paid.
2.5.5 All payments and deposits made by Borrower to Bank shall be
applied at the discretion of Bank. Borrower authorizes Bank to deduct from
any of Borrower's deposit accounts with Bank such amounts as may from time to
time be necessary to effect the payment required hereunder.
2.6 MASTER PROMISSORY NOTE. To evidence Borrower's indebtedness under the
line, Borrower shall execute and deliver to Bank a master promissory note in
substantially the form of Exhibit A attached hereto.
2.7 NOTATIONS. Bank shall make notations in its books and records,
electronic or manual, of all Advances made and credit extended for letters of
credit, accrued interest, payments of principal and interest and the
outstanding principal balance of Advances, which shall be PRIMA FACIE
evidence thereof.
2.8 FEES. As consideration for extension of the Line to Borrower, Borrower
shall pay to Bank a loan fee of .09% of the Line Limit ($9,000), payable on
or before December 31, 1995.
2.9 CANCELLATION OF LINE.
2.9.1 BANK. Notwithstanding anything to the contrary in this
Agreement or the Master Promissory Note, Bank agrees to give Borrower 120
days written notice of any reduction or cancellation of the Line prior to its
expiration date in the absence of an Event of Default under this Agreement.
2.9.2 BORROWER. Notwithstanding anything to the contrary in this
Agreement or the Master Promissory Note, Borrower may cancel the Line prior
to its expiration date by (a) giving Bank written notice of Borrower's intent
to cancel the line and the effective
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cancellation date; (b) paying to Bank in advance a fee based on the unused
portion fee of .09% of the unused portion of the Line, accruing form and
after the end of the previous calendar quarter to the existing expiration
date of the Line, based on an outstanding balance of $0 from and after the
effective cancellation date; and (c) paying to bank the amount of any
outstanding principal and accrued interest as of the effective cancellation
date; provided, that if there is outstanding any Advance bearing interest
based on the Adjusted LIBOR Rate, the effective cancellation date shall not
cause prepayment of such Advance.
3. ADDITIONAL LOANS. Unless expressly agreed in writing by Bank, any
subsequent loans or lines of credit extended to Borrower as long as this
Agreement is in effect shall be included in the definitions of ""Loans''
herein and shall be subject to the terms of this Agreement.
4. CONDITIONS PRECEDENT. In no event will Bank be required to lend funds to
Borrower, make any Advances or extend any other credit pursuant hereto unless
all of the conditions set forth in this Section are satisfied; provided, that
if Bank, in its sole discretion, makes Advances or lends funds to Borrower
before all of the conditions precedent are satisfied, its shall not be deemed
to have waived any such condition except in writing, and Bank may require
that such condition subsequently be satisfied.
4.1 DELIVERY OF DOCUMENTS. Borrower shall have delivered to Bank this
Agreement and the Master Promissory Note, duly executed;
4.2 AUTHORITY. Borrower shall have delivered to Bank such articles of
incorporation, bylaws, corporate resolutions, certificates of incumbency and
other documentation as Bank deems necessary to show that Borrower has the
authority to execute, deliver and perform its obligations under this
Agreement, the Master Promissory Note and any other documents and instruments
executed pursuant hereto;
4.3 REPRESENTATIONS AND WARRANTIES. All representations and warranties set
forth in Section 5 hereof shall be true as of the date of any Advances or
other extension of credit requested by Borrower with the same effect as
though such representations and warranties were made on and as of date of
such Advance or extension of credit; and
4.4 EVENTS OF DEFAULT. No Event of Default or event which, with the passage
of time or the giving of notice or both, would become an Event of Default,
shall have occurred and be continuing.
5. REPRESENTATIONS AND WARRANTIES OF BORROWER. As inducement to Bank to
extend the Line to Borrower, and to make each Advance pursuant thereto,
Borrower makes the following representations and warranties, to the best of
Borrower's knowledge, each of which shall survive the making of any Advance
or other extension of credit pursuant hereto and until the expiration of the
Line, any other Loans and complete repayment of all of Borrower's obligations
to Bank:
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5.1 VALID ENTITY: COMPLIANCE. Borrower is a corporation, duly organized and
validly existing and in good standing under the laws of the State of
Washington and is qualified to do business as a foreign corporation in all
jurisdictions in which the character of the property owned or leased or the
nature of the business conducted by it requires licensing or qualification
and in which the failure to be so licensed or qualified would have a material
adverse effect on its business. To the best of Borrower's knowledge and
belief it has complied with all applicable laws and regulations in the
conduct of its business.
5.2 AUTHORIZATION. The execution, delivery and performance of this
Agreement, the Master Promissory Note and any other instruments or documents
to be executed and/or delivered pursuant hereto have all been duly
authorized, are not in contravention of law or the terms of Borrower's
articles of incorporation or by-laws or any amendment thereof, or of any
agreement or undertaking to which Borrower is a party or by which it is
bound. They will, when duly executed and delivered to Bank, constitute the
valid and binding obligations of Borrower to Bank, in accordance with the
respective terms thereof, and have not been canceled or limited in any way.
5.3 FINANCIAL CONDITION. The financial position of Borrower as reported in
its financial statements dated June 30, 1995, submitted to Bank, are accurate
and complete in all material respects and there has not been any material
adverse change in such financial position prior to the date of this Agreement.
5.4 LITIGATION; JUDGMENTS. There is no litigation at law or in equity and no
proceedings before any commission or other administrative authority pending
or, to the knowledge of Borrower or its officers, directors or principals,
threatened against it or any of its subsidiaries. Borrower is not in default
with respect to any order, writ, injunction, decree, or demand of any court
or administrative body of any governmental unit having jurisdiction over
Borrower or of Borrower's properties or operations and there are no
outstanding judgments against Borrower.
5.5 LICENSES, TAXES. Borrower has duly paid or caused to be paid any and all
license, franchise, corporation, or other taxes, fees, imposts, duties, or
charges levied, assessed, or imposed upon it or upon any of its properties,
of whatsoever kind or description, except those which are being contested by
Borrower in good faith by appropriate proceedings promptly initiated and
diligently conducted and with respect to which reserves deemed adequate by
Bank have been set aside. All reports and forms required to be filed by
Borrower with the Internal Revenue Service or any other taxing authority have
been filed.
5.6 EMPLOYEE BENEFIT PLAN. Borrower is in compliance in all material respects
with any applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") and the regulations and published
interpretations thereunder. No "Reportable Event" within the terms of ERISA
has occurred with respect to any pension plan subject to Title IV of ERISA
administered by it or any administrator designated by it.
5.7 REPRESENTATIONS AS A WHOLE. This Agreement, all financial statements
provided to
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Bank and all other documents, certificates and written statements
furnished to Bank by Borrower, taken as a whole, are complete and do not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained herein or therein
complete and not misleading.
6. AFFIRMATIVE COVENANTS. Borrower covenants that so long as Bank shall
have any commitment hereunder and as long as this Agreement remains in effect
and until complete repayment of all of Borrower's obligations pursuant
hereto, the following covenants will be binding on it:
6.1 PAYMENT. Borrower agrees to pay to Bank the principal of and interest on
each Advance under the Line and, if applicable, any other Loans, and all
other sums due to Bank in accordance with the terms of this Agreement and any
instruments, documents and agreements related to or executed pursuant hereto,
and to perform all of the obligations pursuant thereto.
6.2 BOOKS AND RECORDS. Borrower shall at all times keep proper books and
records of account in which full, true and correct entries will be made of
its transactions in accordance with sound accounting practices.
6.3 LEGAL EXISTENCE AND OPERATIONS. Borrower shall maintain its legal
existence and right to carry on business; continuously operate its business
except for periodic shutdowns in the ordinary course of business and
interruptions caused by strike, labor dispute, catastrophe or any other
events over which it has no control; and maintain, preserve and keep its
buildings, machinery and equipment in good condition, repair and working
order for the proper and efficient operation of its business. If Borrower
operates under a trade name, all necessary registrations will be obtained for
proper use of such name. Borrower shall maintain in full force and effect
any relevant governmental approvals, licenses and permits necessary for the
continued operation of its business.
6.4 INSURANCE. Borrower shall maintain with financially sound and reputable
insurance companies or associations acceptable to Bank, insurance of the
kinds, covering the risks, and in the relative proportionate amounts usually
carried by companies engaged in a business similar to that of Borrower.
Borrower agrees to deliver to Bank such evidence of said insurance as Bank
may from time to time request.
6.5 COMPLIANCE; TAXES. Borrower shall promptly pay or cause to be paid all
taxes, assessments, liens or other governmental charges levied, assessed or
imposed against it or its properties or arising out of its operations and
shall promptly comply with all laws and regulations of the federal government
and of any state of the United States or any subdivisions, departments or
agencies applicable to its business, except those which are being contested
in good faith by appropriate proceedings promptly initiated and diligently
conducted and with respect to which reserves deemed adequate by Bank have
been set aside.
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6.6 FINANCIAL COVENANTS. Borrower shall maintain the following financial
conditions, measured as of each fiscal quarter-end, with all ratios
calculated in accordance with generally accepted accounting principles
("GAAP"), consistently applied, except as otherwise noted below:
6.6.1 TRADING RATIO. Borrower's Trading Ratio shall be no less than
2.0:1.0. For purposes of this covenant, "Trading Ratio" is defined as:
Cash + Accounts Receivable + Inventory
--------------------------------------
Overdraft + Accounts Payable + Outstanding Line Advances
a. Overdraft means book overdraft.
b. Accounts Payable means trade and inventory accounts payable.
c. Outstanding Line Advances means the outstanding principal balance
of the Line, pursuant to this Agreement.
6.6.2 DEBT TO WORTH RATIO. Borrower's Debt to Worth Ratio shall not
exceed 0.7:1.0. For purposes of this covenant, "Debt to Worth Ratio" is
defined as all indebtedness owing by Borrower to any party other than Bank,
excluding Subordinated Debt, divided by stockholder's tangible equity,
including Subordinated Debt.
6.6.3 TANGIBLE NET WORTH. Borrower shall maintain a Tangible Net Worth
of no less than the sum of $20,554,863 (as of March 31, 1995) plus retained
earnings of at least 50% of Borrower's net profits for each of Borrower's
fiscal years from and after March 31, 1995. For purposes of this covenant,
"Tangible Net Worth" is defined as Borrower's total equity, including
Subordinated Debt, less intangibles.
6.6.4 SUBORDINATED DEBT. For purposes of calculating the financial
covenants contained in this paragraph 6.6, "Subordinated Debt" shall mean any
indebtedness owing by Borrower to a third party which is subordinated to
Borrower's indebtedness to Bank pursuant to a subordination agreement
acceptable to Bank. As of the date of this Agreement, there is no such
Subordinated Debt.
6.6.5 INTANGIBLES. For purposes of calculating the financial covenants
contained in this paragraph 6.6, intangibles shall exclude Borrower's rights
to developed software and patents for the "Repartee", "Replay" and
"TeLANophy" systems.
6.7 FINANCIAL INFORMATION. Borrower shall deliver to Bank financial data in
such manner and in such detail as Bank may request from time to time,
including but not limited to the following:
6.7.1 COMPLIANCE CERTIFICATES. Within 60 days of each quarter-end, a
certificate signed by an authorized officer of Borrower, indicating
Borrower's actual financial conditions described in paragraph 6.6 hereof and
stating that, except as noted in the certificate, there exists no Event of
Default or event which, with the passage of time or the giving of notice or
both would become an Event of Default under this Agreement.
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6.7.2 ANNUAL FINANCIAL STATEMENTS. An annual financial statement for
each of Borrower's fiscal years, within 120 days of each fiscal year-end,
consisting of a balance sheet, statement of cash flow and profit and loss
statement, audited by a certified public accounting firm acceptable to Bank;
and
6.7.3 SEC REPORTS. Copies of all annual 10-K and quarterly 10-Q
reports filed by Borrower with the SEC, promptly upon filing of such reports
with the SEC.
6.8 INSPECTION, VERIFICATION. Borrower agrees that Bank may from time to
time, through its duly authorized representative or representatives, visit
and inspect its properties and offices and examine, check, make copies of or
extracts from its books, accounts, orders, records and original
correspondence and to conduct such investigations as Bank may deem
appropriate. Borrower agrees that it will make available to representatives
of Bank, at such places as specified by Bank, its books, records and files at
any time for such purposes.
6.9 NOTIFICATION. Borrower shall promptly notify Bank in writing of the
occurrence of any Event of Default or event which, with notice or passage of
time or both, would constitute an Event of Default; the entry of any judgment
against Borrower; any litigation instituted or threatened against Borrower
or its property; any change in the name or address of Borrower or location of
its books and records.
6.10 BANK ACCOUNTS. Borrower shall at times maintain its principal bank
accounts with Bank. This requirement is not meant as a restriction upon the
maintenance of other banking relationships as may be convenient or necessary
for the business of Borrower but for the purpose that the principal banking
relationships may be maintained with the principal source of financing so
that loan transactions hereunder may be facilitated, and so that Bank may
have the fullest possible information as to Borrower's financial activities,
and so that Bank may have reasonably available to it opportunities to set-off
in the event of collection of indebtedness hereunder.
7. NEGATIVE COVENANTS. As long as Bank shall have any commitment
hereunder and as long as this Agreement remains in effect and until complete
repayment of all of Borrower's obligations pursuant hereto, Borrower agrees
that it will not, without the prior written consent of Bank:
7.1 LIENS. Grant a security interest in or otherwise create, assume or
suffer to exist any lien or encumbrance on any of its real or personal
property, including but not limited to its trading assets (accounts
receivable and inventory) and proceeds thereof;
7.2 INDEBTEDNESS. Incur or commit itself to incur additional indebtedness
(including lease obligations, if any) in the aggregate in excess of $150,000
in any fiscal year, non-cumulative from year to year, exclusive of (i) trade
debt incurred in the normal course of business, (ii) lease obligations in an
aggregate amount of $100,000 per fiscal year, non-cumulative from year to
year, (iii) indebtedness related to Borrower's VMX patent license, and (iv)
indebtedness owing to Bank;
-13-
<PAGE>
7.3 CAPITAL EXPENDITURES. Invest or commit itself to invest in fixed or
capital assets (including capital leases, if any,) in excess of $2,500,000 in
any one fiscal year, non-cumulative from year to year;
7.4 GUARANTIES. Guarantee or otherwise become surety in respect to the
obligations of, or lend its credit to, any other person or entity;
7.5 NATURE OF BUSINESS. Change the general character of its business as
proposed to be conducted at the date hereof, or engage in any type of
business not reasonably related to such business as normally conducted;
7.6 MERGER, LIQUIDATION. Dissolve, liquidate or merge with or into any
other business entity; sell, lease or otherwise dispose of all or
substantially all of its assets;
7.7 CAPITAL STRUCTURE. Change, modify, alter or amend its capital
structure or sell or issue any additional capital stock or warrants, options
or rights to purchase said stock, except for (a) the proposed public offering
of common stock, issuance of options and change in capital structure approved
by Borrower's Board of Directors at its annual meeting on September 1, 1993,
and previously consented to by Bank on September 2, 1993, which consent is
attached hereto as Exhibit B and incorporated herein by this reference; (b)
such subsequent public offerings of common stock as are consented to by Bank,
which consent will not be unreasonably withheld as long as an Event of
Default or an event which, with the passage of time or the giving of notice
or both would become an Event of Default, shall not have occurred and be
continuing and such public offering will not cause Borrower to be out of
compliance with paragraph 6.6 of the Agreement; and (c) any issuance or trade
of common stock related to an acquisition permitted by paragraph 7.8 of this
Agreement;
7.8 ACQUISITIONS. Acquire 50% or more of the capital stock or assets of,
or any interest in, any other entity, in excess of $1,000,000 per entity; or
7.9 LOANS. Make any loans or advances to or for the benefit of any other
person or entity, except loans or advances in the ordinary course of business.
8. DEFAULT.
8.1 EVENTS OF DEFAULT. Nothing in this Section shall restrict the right of
Bank to demand payment upon the indebtedness referred to in this Agreement in
accordance with any promissory notes or other agreements evidencing or
securing such indebtedness subject to paragraph 2.9 hereof. The occurrence of
any of the following shall constitute an Event of Default hereunder and under
each of the notes and other documents related hereto or executed pursuant
hereto:
8.1.1 NONPAYMENT. Borrower shall fail to pay when due the amount of
principal, interest or fees on the Line or any other obligations owing by
Borrower to Bank; provided, however, that once during the lifetime of this
Agreement (as the same
-14-
<PAGE>
may be amended, modified, extended or restated) Borrower shall have 30 days
from and after the due date to cure such default; provided further that once
such cure period is used by Borrower, no additional cure periods shall be
available to Borrower under this paragraph; or
8.1.2 BREACH OF COVENANTS. Borrower shall fail to perform in any
material respect any of the covenants or agreements on its part hereunder,
under any documents executed pursuant hereto or under any other agreements
between Borrower and Bank, including but not limited to the financial
covenants contained in paragraph 6.6 hereof, which failure is not cured
within 30 days of the date of such breach; or
8.1.3 BREACH OF WARRANTY. Any representation or warranty made by
Borrower in this Agreement shall prove to have been false, misleading or
inaccurate in any material respect when made; or
8.1.4 INSOLVENCY. The insolvency of Borrower; the filing by or against
Borrower of a petition for bankruptcy, liquidation or reorganization,
seeking, consenting to or acquiescing in the appointment of any trustee,
receiver, liquidator or custodian of all or such part of its property as in
the opinion of the Bank is a substantial part of its assets; or any such
proceeding instituted against Borrower is not dismissed within thirty (30)
days after institution thereof; the general inability of Borrower to pay its
debts as they come due or any admission in that regard; or the making by
Borrower of a general assignment for the benefit of creditors; or
8.1.5 CESSATION OF EXISTENCE. Borrower shall be dissolved or otherwise
cease to maintain its corporate existence; or
8.1.6 CROSS-DEFAULT. Borrower shall fail to pay when due any
indebtedness or perform any term or covenant pursuant to agreement with any
other party and such failure shall continue after any applicable grace period
if the effect of such failure is to accelerate or permit the acceleration of
the maturity of any indebtedness to such party in excess of $100,000; or
8.1.7 JUDGMENTS. A final judgment is entered against Borrower in
excess of $100,000 and is not satisfied or stayed within ten (10) days; or
8.1.8 CONDEMNATIONS. All or a substantial portion of the property of
Borrower shall be condemned, seized or otherwise apportioned.
8.2 REMEDIES. Upon the occurrence of one or more of the Events of Default set
forth herein, Bank shall have no obligation to make any further Advances or
extend further credit to Borrower and Bank shall be entitled, at its sole
option and without further notice to Borrower, to declare any or all
indebtedness due on the Line and all other indebtedness of Borrower to Bank
immediately due and payable without the expiration of any period of grace;
and Bank shall be entitled to all legal recourse against Borrower and to
pursue and enforce, either successively or concurrently, all rights and
remedies set forth in this
-15-
<PAGE>
Agreement and any other instruments, agreements and documents executed pursuant
hereto and such other rights and remedies as Bank may have under applicable law.
9. COST AND EXPENSES; ATTORNEY'S FEES. Borrower shall pay all fees, costs,
charges and expenses of Bank, including without limitation expenses for the
services of counsel both retained and employed by Bank, in collecting or
attempting to collect any indebtedness referred to in this Agreement (including
arbitration, trial, appellate and bankruptcy proceedings and actions without
suit).
10. NON-WAIVER. No failure of Bank to enforce its rights, remedies or options
under this Agreement, or any other agreement between Borrower and Bank shall be
deemed to be a waiver thereof nor shall any single or partial exercise of any
such right or power preclude any further exercise thereof or the exercise of
any other right or power. Any waiver, permit, consent or approval of any kind
by Bank must be in writing and shall be effective only to the extent
specifically set out in such writing.
11. NOTICES. Any notice to be given to Bank hereunder may be given to Bank, if
by personal delivery, at 999 Third Avenue (11th Floor), Seattle, Washington
98104 or, if by letter, at P.O. Box 160 (M/S 151), Seattle, Washington 98111,
Attention: King County Commercial Banking, Stella Dier. Any notice to be given
to Borrower may be given to it at 2901 Third Avenue, Suite 500, Seattle,
Washington 98121-9800. Such addresses for notices may be changed by giving ten
(10) days written notice to the other party.
12. CONSTRUCTION; CONSENT TO VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington. To the extent
not otherwise governed by the Arbitration Program incorporated by reference
into this Agreement, jurisdiction over and venue of any action to enforce,
interpret, construe or otherwise in connection with this Agreement or any
agreements, instruments or documents related hereto or executed pursuant hereto
shall, at Bank's option, be had in the United States District Court or Superior
Court of located in Seattle, King County, Washington.
13. ASSIGNMENT. This Agreement shall be binding upon and inure the benefit of
the parties and their respective successors and assigns, except that Borrower
may not assign or otherwise transfer all or any part of its rights or
obligations hereunder without the prior written consent of Bank. Bank may at
any time assign or otherwise transfer all or any part of its interest hereunder
or under any of the documents executed pursuant hereto, and to the extent of
such assignment or transfer the assignee or transferee shall have the same
rights or remedies against Borrower and otherwise under this Agreement and all
documents executed pursuant hereto, including but not limited to the right of
setoff.
14. CONFIDENTIALITY. Bank agrees that it will exercise its best efforts to
keep confidential all nonpublic financial and other information obtained by
Bank about Borrower under paragraphs 6.7 and 6.8 of this Agreement and to
prevent such nonpublic information from being disclosed to third parties other
than Bank's employees, officers,
-16-
<PAGE>
directors, affiliates and regulators, to whom such information is disclosed in
the ordinary course of Bank's business.
15. SEVERABILITY. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall as to such jurisdiction be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions or affecting the validity or enforceability of such
provision in any other jurisdiction.
16. MISCELLANEOUS. In this Agreement, whenever the context so requires, the
neuter gender includes the masculine and the feminine, the singular number
includes the plural, and the plural number includes the singular. If this
Agreement is executed by more than one person, firm or corporation as
"Borrower", the obligations of each shall be joint and several and the
representations and warranties and covenants shall apply to each of them
unless specified otherwise.
17. ORAL AGREEMENTS. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
UNDER WASHINGTON LAW.
18. ARBITRATION PROGRAM. ALL DISPUTES ARISING OUT OF OR IN CONNECTION WITH OR
RELATED TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS SHALL BE
RESOLVED IN ACCORDANCE WITH THE FIRST INTERSTATE ARBITRATION PROGRAM, a copy of
which is attached to this Agreement as Exhibit B and made a part hereof.
FIRST INTERSTATE BANK ACTIVE VOICE CORPORATION
OF WASHINGTON, N.A.
By /s/ Stella M. Dier By /s/ Robert L. Richmond
------------------------------ -----------------------------
Its Vice President Its President
------------------------------ -----------------------------
By /s/ Robert Greco
-----------------------------
Its Vice President and Secretary
-----------------------------
-17-
<PAGE>
MASTER PROMISSORY NOTE
$10,000,000.00 September 30, 1995
For value received the undersigned Borrower promises to pay to the order of
FIRST INTERSTATE BANK OF WASHINGTON, N.A. ("Bank") or the holder hereof in
lawful money of the United States of America in immediately available funds on
demand, or if no demand is made then on September 30, 1996, the sum of ten
million dollars ($10,000,000) or so much thereof as shall have been advanced by
Bank to or for the benefit of Borrower and not repaid, and all Advances,
together with interest thereon on the dates and at the rates provided for in
the Loan Agreement between Borrower and Bank dated as of September 30, 1995
(together with any modifications, extensions and renewals, the "Loan
Agreement").
The date, amount, interest rate and maturity date of each Advance and all
payments made on account of principal and interest on each Advance shall be
endorsed by the holder hereof on a grid attached to this note or entered upon
such other books and records as Bank or such holder shall maintain, such
grid(s) or records being incorporated as a part hereof. All such entries shall
be PRIMA FACIE evidence of the amount, interest rate and maturity date of each
Advance, payments of principal and interest and of the outstanding balance of
principal and interest hereof.
Interest is payable on all Advances monthly, as billed. There shall be no
prepayment of Advances bearing interest based on the Adjusted LIBOR Rate. The
entire balance of outstanding principal and interest shall be due and payable
on September 30, 1996.
Principal and interest shall be payable in Federal or other immediately
available funds at First Interstate Bank of Washington, N.A., 999 Third Avenue,
Seattle, Washington 98104, or such other location as Bank may designate.
Payments shall be applied first to any fees, expenses and indemnities due Bank;
then to accrued but unpaid interest, then to principal; provided, that after
the occurrence of a default hereunder or an Event of Default under the Loan
Agreement, Bank may apply payments as it determines, in its sole discretion.
Payments received by Bank by 3:00 p.m. of a Business Day will be credited that
day.
Any makers, endorsers, sureties or guarantors hereof shall be jointly and
severally bound, and jointly and severally waive presentment, demand, protest
and notice of dishonor and agree to remain bound for payment of this obligation
notwithstanding any and all renewals and extensions of time of payment hereof,
substitution or release of security, if any, by agreement between the holder
hereof and any owners of the collateral affected by
<PAGE>
instruments securing this note, hereby waiving notice of such renewals,
extensions, substitutions, releases or other indulgences.
This note is made with reference to and is to be construed and enforced in
accordance with the laws of the State of Washington. Jurisdiction over and
venue of any action to enforce, interpret, construe or otherwise in
connection herewith shall, at Bank's option, be had in the United States
District Court or Superior Court located in King County, Washington.
This note is the Master Promissory Note referred to in the Loan Agreement.
Terms not otherwise defined herein shall have the definitions given them in
the Loan Agreement. Reference is made to the Loan Agreement for provisions
related to the methods of requesting Advances, interest rates, the repayment
thereof, default and acceleration of the maturity hereof and arbitration
provisions.
ACTIVE VOICE CORPORATION
By /s/ Robert L. Richmond
-----------------------------
Its President
-----------------------------
By /s/ Robert Greco
-----------------------------
Its VP & Secretary
-----------------------------
Address:
2901 Third Avenue, Suite 500
Seattle, Washington 98121-9800
-2-
<PAGE>
Exhibit B
FIRST INTERSTATE BANK ARBITRATION PROGRAM
1. BINDING ARBITRATION. Upon the demand of any party ("Party/Parties"), to a
Document (as defined below), whether made before the institution of any
judicial proceeding or not more than 60 days after service of a complaint,
third party complaint, cross-claim or counterclaim or any answer thereto or
any amendment to any of the above, any Dispute (as defined below) shall be
resolved by binding arbitration in accordance with the terms of this
Arbitration Program. A "Dispute" shall include any action, dispute, claim or
controversy of any kind, whether founded in contract, tort, statutory or
common law, equity, or otherwise, now existing or hereafter arising between
any of the Parties arising out of, pertaining to or in connection with any
agreement, document or instrument to which this Arbitration Program is
attached or in which it appears or is referenced or any related agreements,
documents, or instruments ("Documents"). Any Party who fails to submit to
binding arbitration following a lawful demand by another Party shall bear all
costs and expenses, including reasonable attorneys' fees, (including those
incurred in any trial, bankruptcy proceeding or on appeal) incurred by the
other Party in obtaining a stay of any pending judicial proceeding and
compelling arbitration of any Dispute. The parties agree that any agreement,
document or instrument which includes, attaches to or incorporates this
Arbitration Program represents a transaction involving commerce as the at
term is used in the Federal Arbitration Act, ("FAA") Title 9 United States
Code. THE PARTIES UNDERSTAND THAT BY THIS AGREEMENT THEY HAVE DECIDED THAT
THEIR DISPUTES SHALL BE RESOLVED BY BINDING ARBITRATION RATHER THAN IN COURT,
AND ONCE DECIDED BY ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR
PURSUED IN COURT.
2. GOVERNING RULES. Arbitrations conducted pursuant to this Arbitration
Program shall be administered by the American Arbitration Association ("AAA"),
or other mutually agreeable administrator ("Administrator") in accordance
with the terms of this Arbitration Program and the Commercial Arbitration
Rules of the AAA. Proceedings hereunder shall be governed by the provisions
of the FAA. The arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law designated in the Documents. Judgment upon any
award rendered hereunder may be entered in any court having jurisdiction;
provided, however that nothing herein shall be construed to be a waiver by
any party that is a bank of the protections afforded pursuant to 12 U.S.C. 91
or any similar applicable state law.
3. PRESERVATION OF REMEDIES. No provision of, nor the exercise of any rights
under, this arbitration clause shall limit the right of any Party to: (1)
foreclose against any real or personal property collateral or other security,
or obtain a personal or deficiency award; (2) exercise self-help remedies
(including repossession and setoff rights); or (3) obtain provisional or
ancillary remedies such as injunctive relief, sequestration, attachment,
replevin, garnishment, or the appointment of a receiver from a court having
jurisdiction. Such rights can be exercised at any time except to the extent
such action is contrary to a final award or decision in any arbitration
proceeding. The institution and maintenance of an action as described above
shall not constitute a waiver of the right of any Party to submit the
Dispute to arbitration, nor render inapplicable the compulsory arbitration
provisions hereof. Any claim or Dispute related to exercise of any self-help,
auxiliary or other rights under this paragraph shall be a Dispute hereunder.
4. ARBITRATOR POWERS AND QUALIFICATIONS; AWARDS. The Parties agree to select
a neutral "qualified" arbitrator or a panel of three "qualified" arbitrators
to resolve any Dispute hereunder. "Qualified" means a practicing attorney,
with not less than 10 years practice in commercial law, licensed to practice
in the state of the applicable substantive law designated in the Documents. A
Dispute in which the claims or amounts in controversy do not exceed
$1,000,000.00, shall be decided by a single arbitrator. A single arbitrator
shall have authority to render an award up to but not to exceed
$1,000,000.00 including all damages of any kind whatsoever, costs, fees,
attorneys' fees and expenses. Submission to a single arbitrator shall be a
waiver of all Parties' claims to recover more than $1,000,000.00. A Dispute
involving claims or amounts in controversy exceeding $1,000,000.00 shall be
decided by a majority vote of a panel of three qualified arbitrators. The
arbitrator(s) shall not have the power to award punitive or exemplary damages
except where such damages are specifically provided for by statute upon which
the award is based. The arbitrator(s) shall be
<PAGE>
empowered to, at the written request of any Party in any Dispute, 1) to
consolidate in a single proceeding any multiple party claims that are
substantially identical or based upon the same underlying transaction; 2) to
consolidate any claims and Disputes between other Parties which arise out of
or relate to the subject matter hereof, including all claims by or against
borrowers, guarantors, sureties and or owners of collateral; and 3) to
administer multiple arbitration claims as class actions in accordance with
Rule 23 of the Federal Rules of Civil Procedure. In any consolidated
proceeding the first arbitrator(s) selected in any proceeding shall conduct
the consolidated proceeding unless disqualified due to conflict of interest.
The arbitrator(s) shall be empowered to resolve any dispute regarding the
terms of this arbitration clause, including questions about the arbitrability
of any Dispute, but shall have no power to change or alter the terms of this
Arbitration Program. The prevailing Party in any Dispute shall be entitled to
recover its reasonable attorneys' fees in any arbitration, and the
arbitrator(s) shall have the power to award such fees. The award of the
arbitrator(s) shall be in writing and shall set forth the factual and legal
basis for the award.
5. MISCELLANEOUS. All statutes of limitation applicable to any Dispute shall
apply to any proceeding in accordance with this arbitration clause. The
Parties agree, to the maximum extent practicable, to take any action
necessary to conclude an arbitration hereunder within 180 days of the filing
of a Dispute with the Administrator. The arbitrator(s) shall be empowered to
impose sanctions for any Party's failure to proceed within the times
established herein. Arbitrations shall be conducted in the state of the
applicable substantive law designated in the Documents. The provisions of
this Arbitration Program shall survive any termination, amendment, or
expiration hereof or of the Documents unless the Parties otherwise expressly
agree in writing. Each Party agrees to keep all Disputes and arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the Parties or as required by
applicable law or regulation. If any provision of this Arbitration Program is
declared invalid by any court, the remaining provisions shall not be affected
thereby and shall remain fully enforceable.
<PAGE>
EXHIBIT 11.1
ACTIVE VOICE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Average shares outstanding 4,515,698 4,434,541 3,276,175
Net effect of dilutive stock options
based on the treasury stock method
using average market price 128,046 168,920 226,727
Net effect of stock options issued during the
12 months prior to the initial public
offering at less than the offering price
based on the treasury stock method using
$15.00 per share, treated as outstanding for
all periods presented 39,373
Dilutive effect of Convertible Preferred Stock 519,323
----------- ----------- -----------
Total 4,643,744 4,603,461 4,061,598
----------- ----------- -----------
----------- ----------- -----------
Net income $5,161,914 $5,109,725 $3,579,147
----------- ----------- -----------
----------- ----------- -----------
Per share amount $1.11 $1.11 $0.88
----------- ----------- -----------
----------- ----------- -----------
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding 4,515,698 4,434,541 3,276,175
Net effect of dilutive stock options based
on the treasury stock method using the year
end market price, if higher than average
market price 129,690 173,683 237,616
Net effect of stock options issued during
the 12 months prior to the initial public
offering at less than the offering price
based on the treasury stock method using
$15.00 per share, treated as outstanding
for all periods presented 39,373
Dilutive effect of Convertible Preferred Stock 519,323
----------- ----------- -----------
Total 4,645,388 4,608,224 4,072,487
----------- ----------- -----------
----------- ----------- -----------
Net income $5,161,914 $5,109,725 $3,579,147
----------- ----------- -----------
----------- ----------- -----------
Per share amount $1.11 $1.11 $0.88
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(For S-8, No. 33-80168) pertaining to the Incentive Stock Option Plan,
Directors Stock Option Plan, 1988 Nonqualified Stock Option Plan, 1993
Stock Option Plan, and other Employee Benefit Plans of Active Voice
Corporation of our report dated May 3, 1996, with respect to the
consolidated financial statements and schedule of Active Voice Corporation
included in this Annual Report (Form 10-K) for the year ended March 31,
1996.
ERNST & YOUNG LLP
Seattle, Washington
June 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> MAR-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 3,390
<SECURITIES> 7,217
<RECEIVABLES> 9,993
<ALLOWANCES> 1,365
<INVENTORY> 5,483
<CURRENT-ASSETS> 26,515
<PP&E> 4,667
<DEPRECIATION> 2,572
<TOTAL-ASSETS> 37,400
<CURRENT-LIABILITIES> 5,603
<BONDS> 0
0
0
<COMMON> 16,791
<OTHER-SE> 15,006
<TOTAL-LIABILITY-AND-EQUITY> 37,400
<SALES> 45,138
<TOTAL-REVENUES> 45,138
<CGS> 17,018
<TOTAL-COSTS> 17,018
<OTHER-EXPENSES> 21,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,572
<INCOME-TAX> 2,410
<INCOME-CONTINUING> 5,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,162
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
</TABLE>
<PAGE>
ACTIVE VOICE CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE 1: PURPOSE
The purpose of this 1996 Employee Stock Purchase Plan (the "Plan") is to
advance the interests of Active Voice Corporation, a Washington corporation (the
"Company"), by enabling Eligible Employees (as defined in Article 3) to acquire
a larger personal proprietary interest in the Company. The Plan is also designed
to encourage Eligible Employees to remain in the employ of the Company and its
subsidiaries and have a personal interest in the success of the Company. The
Plan is intended to constitute an "employee stock purchase plan," as defined in
Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
and shall be interpreted and administered to further that intent.
ARTICLE 2: ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board"), as the
Committee may be constituted from time to time. Subject to the provisions of the
Plan, the Committee shall have the complete authority, in its sole and absolute
discretion, to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, and to make all of the determinations
necessary or advisable for the administration of the Plan. All such
interpretations, rules, regulations and determinations shall, in the absent of
fraud or patent mistake, be conclusive and binding on all persons with any
interest in the Plan.
A majority of the members of the Committee shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination of the Committee reduced to writing and signed by all
members of the Committee shall be as fully effective as if it had been made at a
meeting duly called and held.
ARTICLE 3: ELIGIBLE EMPLOYEES
As used in the Plan, the term "Eligible Employees" means all common law
employees of the Company and its subsidiaries, except the following: (a)
employees who have been employed for less than 90 days; (b) employees whose
customary employment is 20 hours or less per week; and (c) employees whose
customary employment is for not more than 5 months in any calendar year. Except
as otherwise expressly provided in the Plan and permitted by Section 423 of the
Code, all Eligible Employees shall have the same rights and obligations under
the Plan.
Notwithstanding the foregoing provisions of this Article 3, an employee
will not be an Eligible Employee for purposes of the Plan if the employee owns
stock possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company. For purposes of this 5% limitation, an employee
shall be treated as owning any stock the ownership of which is attributed to him
or her under the rules of Section 424(d) of the Code, as well as any stock that,
in the absence of this paragraph, the employee could purchase under the Plan
with his or her payroll deductions held pursuant to Article 6 but not yet
applied to the purchase of shares of Common Stock under the Plan.
The right of an Eligible Employee to participate in the Plan shall not be
affected by any change in the Eligible Employee's employment, so long as he or
she continues to be an employee of the Company or one of its subsidiaries. If an
Eligible Employee is employed by a
<PAGE>
subsidiary of the Company that ceases to be a subsidiary, such event shall be
deemed to constitute a termination of the Eligible Employee's employment.
ARTICLE 4: STOCK SUBJECT TO THE PLAN
The stock subject to the Plan shall be shares of the Company's authorized
but unissued Common Stock, no par value (the "Common Stock"). The aggregate
number of shares of Common Stock that may be purchased by Eligible Employees
pursuant to the Plan is 150,000, subject to adjustment as provided in Article
13.
ARTICLE 5: PAYMENT PERIODS
The Plan will be administered based on calendar quarters (the "Payment
Periods"). The first Payment Period will begin on July 1, 1996 and end on
September 30, 1996. Thereafter, the Payment Periods will begin on the first
Business Day (as defined in Article 8) and end on the last Business Day of each
calendar quarter.
ARTICLE 6: PARTICIPANTS; PAYROLL DEDUCTIONS
Any person who is an Eligible Employee at the beginning of a Payment Period
may elect, in accordance with procedures prescribed by the Committee, to have
the Company deduct a specified percentage of the employee's Compensation (as
defined below) for the purchase of shares of Common Stock pursuant to the Plan.
Each Eligible Employee who elects to have such deductions made will be referred
to in the Plan as a "Participant."
As used in the Plan, the term "Compensation" means all monetary salary,
wages, bonuses, commissions and other remuneration paid to or on behalf of a
Participant for services performed or on account of holidays, vacation, sick
leave or other similar events, including any amounts by which such remuneration
is reduced, at the election of a Participant, pursuant to a cafeteria plan
described in Section 125 of the Code, a dependent care assistance program
described in Section 129 of the Code, a cash or deferred arrangement described
in Section 401(k) of the Code, or any similar plan, program or arrangement, but
excluding the value of any noncash benefits under any employee benefit plans of
the Company or any of its subsidiaries.
The maximum rate of deduction that a Participant may elect for any Payment
Period is 10%. An amount equal to the elected percentage of the Participant's
Compensation shall be deducted on each regular pay day falling within the
Payment Period. The Committee may set such minimum level of payroll deductions
as the Committee determines to be appropriate. Any minimum level of deductions
mandated by the Committee shall apply equally to all Eligible Employees. No
interest will be paid on payroll deductions accumulated under the Plan.
ARTICLE 7: PURCHASE OF SHARES
At the end of a Payment Period, a Participant's accumulated payroll
deductions for the Payment Period will, subject to the limitations in Article 9
and the termination provisions of Article 16, be applied toward the purchase of
shares of Common Stock at a purchase price (the "Purchase Price") equal to the
lesser of --
(a) 85% of the Market Price of the Common Stock on the first
Business Day of the Payment Period; or
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(b) 85% of the Market Price for the Common Stock on the last
Business Day of the Payment Period;
in either event rounded to the nearest whole cent.
Shares of Common Stock may be purchased under the Plan only with a
Participant's accumulated payroll deductions. Fractional shares cannot be
purchased. Any portion of a Participant's accumulated payroll deductions for a
Payment Period not used for the purchase of Common Stock shall be applied to the
purchase of Common Stock in the next Payment Period, if the Participant is
participating in the Plan during that Payment Period, or returned to the
Participant.
Each Participant who purchases shares of Common Stock under the Plan shall
thereby be deemed to have agreed that the Company or the subsidiary of the
Company that employs the Participant shall be entitled to withhold, from any
other amounts that may be payable to the Participant at or around the time of
the purchase, such federal, state, local and foreign income, employment and
other taxes may be required to be withheld under applicable laws. In lieu of
such withholding, the Company or such subsidiary may require the Participant to
remit such taxes to the Company or such subsidiary as a condition of the
purchase.
ARTICLE 8: MARKET PRICE
For purposes of the Plan, the term "Market Price" on any day means, if the
Common Stock is publicly traded, the last sales price (or, if no last sales
price is reported, the average of the high bid and low asked prices) for a share
of Common Stock on that day as reported by the principal exchange on which the
Common Stock is listed, or, if the Common Stock is publicly traded but not
listed on an exchange, as reported by The Nasdaq Stock Market, or, if such
prices or quotations are not reported by The Nasdaq Stock Market, as reported by
any other available source of prices or quotations selected by the Committee.
For purposes of the Plan, the term "Business Day" means a day on which
prices or quotations for the Common Stock are reported by a national securities
exchange, the Nasdaq Stock Market, or any other available source of prices or
quotations selected by the Committee, whichever is applicable pursuant to the
preceding paragraph.
If the Market Price of the Common Stock must be determined for purposes of
the Plan at a time when the Common Stock is not publicly traded, then the term
"Market Price" shall mean the fair market value of the Common Stock as
determined by the Committee, after taking into consideration all the factors it
deems appropriate, including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at arm's length.
ARTICLE 9: LIMITATIONS ON SHARE PURCHASES
During any calendar year, the maximum value of the Common Stock that may be
purchased by a Participant under the Plan is $25,000, said value to be
determined on the basis of the Market Price of the Common Stock on the first
Business Day of each Payment Period that ends in the calendar year. The
foregoing limitation is intended to and shall be interpreted in such a manner as
will comply with Section 423(b)(8) of the Code.
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ARTICLE 10: NO CHANGE IN PAYROLL DEDUCTIONS
Payroll deductions for a Payment Period may not be increased or decreased
by a Participant during the Payment Period. However, the Participant may
withdraw in full from the Plan, in accordance with Article 11 of the Plan.
ARTICLE 11: WITHDRAWAL FROM THE PLAN
At any time prior to the last day of a Payment Period, a Participant may
elect, in accordance with procedures prescribed by the Committee, to withdraw
from the Plan for that Payment Period. No such election to withdraw will be
effective unless the Committee receives written notice thereof prior to the end
of the Payment Period for which withdrawal is elected. If a Participant
withdraws effective prior to the end of a Payment Period, all of the
Participant's payroll deductions for that Payment Period will be promptly
returned to the Participant, and the Participant will not be eligible to
participate in the Plan again until the first Payment Period of the following
calendar year. If a Participant withdraws effective for a Payment Period that
has not yet commenced, the Participant may elect to participate in any
subsequent Payment Period. If a Participant's payroll deductions are interrupted
by any legal process, the Participant will be deemed to have elected to withdraw
from the Plan for the Payment Period in which the interruption occurs.
ARTICLE 12: ISSUANCE OF COMMON STOCK
Certificates for the shares of Common Stock purchased by Participants will
be delivered by the Company's transfer agent as soon as practicable after each
Payment Period. Common Stock purchased under the Plan will be issued only in the
name of the Participant (or, if his or her authorization so designates, in the
name of the Participant and another person of legal age as joint tenants with
rights of survivorship). In lieu of issuing certificates directly to
Participants (and their designates), the Company shall be entitled to have the
shares of Common Stock purchased by Participants issued to a bank, broker-dealer
or similar custodian that has agreed to hold such shares for the accounts of the
respective Participants. Fees and expenses of the bank, broker-dealer or similar
custodian shall be paid by the Company or allocated among the respective
Participants in such manner as the Committee determines.
ARTICLE 13: CHANGES IN CAPITALIZATION
Upon the happening of any of the following described events, a
Participant's right to purchase shares of Common Stock under the Plan shall be
adjusted as hereinafter provided:
(a) If the shares of Common Stock are subdivided or combined
into a greater or smaller number of shares of Common Stock or if, upon
a recapitalization, split-up or other reorganization of the Company,
the shares of Common Stock are exchanged for other securities of the
Company, the rights of each Participant shall be modified so that the
Participant is entitled to purchase, in lieu of the shares of Common
Stock that the Participant would otherwise have been entitled to
purchase for the Payment Period in progress at the time of such
subdivision, combination or exchange (the "Payment Period Shares"),
such number of shares of Common Stock or such number and type of other
securities as the Participant would have received if such Payment
Period Shares had been issued and outstanding at the time of such
subdivision, combination or exchange (unless in the case of an
exchange the Committee
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determines that the nature of the exchange is such that it is not feasible
or advisable that the rights of Participants be so modified, in which event
the exchange shall be deemed a Terminating Event under Article 14); and
(b) If the Company issues any of its shares as a stock dividend
upon or with respect to the Common Stock, each Participant who
purchases shares of Common Stock under the Plan at the end of the
Payment Period in progress on the record date for the stock dividend
shall be entitled to receive the shares so purchased (the "Purchased
Shares") and shall also be entitled to receive, at no additional cost,
the number of shares of the class of stock issued as a stock dividend,
and the amount of cash in lieu of fractional shares, that the
Participant would have received if he or she had been the holder of
the Purchased Shares on the record date for the stock dividend.
Upon the happening of an event specified in clause (a) or (b) above, the
class and aggregate number of shares available under the Plan, as set forth in
Article 4, shall be appropriately adjusted to reflect the event. Notwithstanding
the foregoing, such adjustments shall be made only to the extent that the
Committee, based on advice of counsel for the Company, determines that such
adjustments will not constitute a change requiring shareholder approval under
Section 423(b)(2) of the Code.
The Committee shall make all determinations necessary or advisable in
connection with this Article 13, and its determinations shall, in the absent of
fraud or patent mistake, be conclusive and binding on all persons with any
interest in the Plan.
ARTICLE 14: TERMINATING EVENTS
Upon (a) the dissolution or liquidation of the Company, (b) a merger or
other reorganization of the Company with one or more corporations as a result of
which the Company will not be a surviving corporation, (c) the sale of all or
substantially all of the assets of the Company or a material division of the
Company, (d) a sale or other transfer, pursuant to a tender offer or otherwise,
of more than fifty percent (50%) of the then outstanding shares of Common Stock
of the Company, (e) an acquisition by the Company resulting in an extraordinary
expansion of the Company's business or the addition of a material new line of
business, or (f) any exchange that is subject to this Article 14 in accordance
with the provisions of Article 13 (any of such events is herein referred to as a
"Terminating Event"), the Committee may but shall not be required to --
(a) make provision for the continuation of the Participants'
rights under the Plan on such terms and conditions as the Committee
determines to be appropriate and equitable, including where
applicable, but not limited to, an arrangement for the substitution on
an equitable basis, for each share of Common Stock that could
otherwise be purchased at the end of the Payment Period in progress at
the time of the Terminating Event, of any consideration payable with
respect to each then outstanding share of Common Stock in connection
with the Terminating Event; or
(b) terminate all rights of Participants under the Plan for such
Payment Period and --
(i) return to the Participants all of their payroll
deductions for such Payment Period; and
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(ii) for each share of Common Stock, if any, that could
otherwise be purchased under the Plan by a Participant at the end
of such Payment Period (determined by assuming that payroll
deductions at the rate elected by the Participant were continued
to the end of the Payroll Period and used to purchase shares
based on the Market Price of the Common Stock on the first
Business Day of the Payment Period) and with respect to which (A)
the Purchase Price at which such share could be purchased
(determined with reference only to the Market Price of the Common
Stock on the first Business Day of the Payment Period) is
exceeded by (B) the Market Price on the date of the Terminating
Event of a share of Common Stock, as determined by the Committee,
pay to the Participant an amount equal to such excess.
The Committee shall make all determinations necessary or advisable in
connection with Terminating Events, and its determinations shall, in the absent
of fraud or patent mistake, be conclusive and binding on all persons with any
interest in the Plan.
ARTICLE 15: NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS
An Eligible Employee's rights under the Plan are the Eligible Employee's
alone and may not be voluntarily or involuntarily transferred or assigned to, or
availed of by, any other person other than by will or the laws of descent and
distribution. An Eligible Employee's rights under the Plan are exercisable
during his or her lifetime by the Eligible Employee alone.
ARTICLE 16: TERMINATION OF EMPLOYEE'S RIGHTS
Subject to the provisions of the next paragraph, a Participant's rights
under the Plan will terminate if he or she for any reason (including death,
disability or voluntary or involuntary termination of employment) ceases to be
an employee of the Company or one of its subsidiaries.
Notwithstanding the foregoing, if a Participant ceases to be an employee of
the Company or one of its subsidiaries, the termination of the Participant's
rights under the preceding paragraph shall not apply to any right the
Participant may have to purchase shares of Common Stock at the end of the
Payment Period in progress when the Participant ceases to be an employee. Such
purchases of shares of Common Stock shall, to the extent of payroll deductions
accumulated for the Payment Period, occur automatically at the end of the
Payment Period, unless the Participant or his or her personal representative
withdraws from the Plan for the Payment Period in the manner described in
Article 11.
To the extent that the rights of a Participant terminate in accordance with
this Article 16, any of the Participant's payroll deductions not used to
purchase shares of Common Stock will be promptly returned to the Participant or
his or her personal representative.
ARTICLE 17: TERMINATION AND AMENDMENTS TO PLAN
The Plan may be terminated at any time by the Board, but, except as
provided in Article 14, such termination shall not affect the rights of
Participants under the Plan for the Payment Period in progress at the time of
termination. The Plan will terminate in any case when all or substantially all
of the unissued shares of Common Stock reserved for the purposes of the Plan
have been purchased. If at any time shares of Common Stock reserved for the
purpose of the Plan remain available for purchase but not in sufficient number
to satisfy all then unfilled
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purchase requirements, the available shares shall be apportioned among
Participants in proportion to the respective amounts of their accumulated
payroll deductions, and the Plan shall terminate. Upon such termination or any
other termination of the Plan, all payroll deductions not used to purchase
shares of Common Stock will be refunded to the Participants entitled thereto.
The Committee or the Board may from time to time adopt amendments to the
Plan; PROVIDED, HOWEVER, that, without the approval of the shareholders of the
Company, no amendment may increase the number of shares that may be issued under
the Plan or change the class of employees eligible to participate under the
Plan.
ARTICLE 18: LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN
The Plan is intended to provide shares of Common Stock for investment and
not for resale. The Company does not, however, intend to restrict or influence
any Participant in the conduct of his or her own affairs. A Participant may,
therefore, sell shares of Common Stock purchased under the Plan at any time the
Participant chooses, subject to compliance with any applicable federal or state
securities or other laws; PROVIDED, HOWEVER, that because of certain federal tax
requirements, each Participant agrees by purchasing shares of Common Stock under
the Plan at the end of a Payment Period that (a) the Participant will promptly
give the Company notice of any disposition of such shares that occurs within two
(2) years after the beginning of the Payment Period, showing the number of such
shares disposed of and the consideration received therefor; (b) the Company
shall be entitled to withhold, from any other amounts that may be payable to the
Participant by the Company at or around the time of such disposition, such
federal, state, local and foreign income, employment and other taxes as the
Company may be required to withhold under applicable law; and (c) in lieu of
such withholding, the Participant will, upon request of the Company, promptly
remit such taxes to the Company. The Company shall be entitled, in order to
ensure compliance with the requirements of this Article 18, to place an
appropriate legend on certificates representing shares purchased under the Plan.
EACH EMPLOYEE PURCHASING SHARES OF COMMON STOCK UNDER THE PLAN ASSUMES THE RISK
OF ANY MARKET FLUCTUATIONS IN THE PRICE THEREOF.
ARTICLE 19: NO SHAREHOLDER RIGHTS; INFORMATION TO PARTICIPANTS
A Participant in the Plan shall not have any rights as a shareholder of the
Company (other than the right to receive stock dividends under Article 13) on
account of shares of Common Stock that may be purchased under the Plan prior to
the time such shares are actually purchased by and issued to the Participant.
Notwithstanding the foregoing, the Company shall deliver to each Participant
under the Plan who does not otherwise receive such materials (a) a copy of the
Company's annual financial statements (which shall be delivered annually as
promptly as practical following each fiscal year of the Company and review or
audit of such statements by the Company's auditors), together with management's
discussion and analysis of financial condition and results of operations for the
fiscal year, and (b) a copy of all reports, proxy statements and other
communications distributed to the Company's security holders generally.
ARTICLE 20: APPLICATION OF FUNDS
The proceeds received by the Company from the sale of shares of Common
Stock under the Plan will be used for general corporate purposes.
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ARTICLE 21: GOVERNMENTAL REGULATIONS
The Company's obligation to sell and deliver shares of the Common Stock
under the Plan is subject to the approval of any governmental authority required
in connection with the authorization, issuance or sale of such shares, including
the Securities and Exchange Commission, the securities administrators of the
states in which Participants reside, and the Internal Revenue Service.
ARTICLE 22: MISCELLANEOUS PROVISIONS
(a) Nothing contained in the Plan shall obligate the Company to employ a
Participant for any period, nor shall the Plan interfere in any way with the
right of the Company to reduce a Participant's compensation.
(b) The provisions of the Plan shall be binding upon each Participant and,
subject to the provisions of Article 15, the heirs, successors and assigns of
each Participant.
(c) Where the context so requires, references in the Plan to the singular
shall include the plural, and vice versa, and references to a particular gender
shall include either or both additional genders.
(d) The Plan shall be construed, administered and enforced in accordance
with the laws of the United States, to the extent applicable thereto, as well as
the laws of the State of Washington.
ARTICLE 23: APPROVAL OF SHAREHOLDERS
The Plan shall be effective July 1, 1996, subject to approval by the
holders of a majority of the shares of the Company present or represented by
proxy at the first annual meeting of the shareholders of the Company held after
the date on which the Plan is adopted by the Board of the Company. The Plan
shall also be subject to approval by the shareholders of the Company in a manner
that complies with Section 423(b)(2) of the Code. If such approvals do not occur
prior to the end of the first Payment Period under the Plan, the Plan and all
rights of Participants under the Plan shall terminate, and all payroll
deductions of Participants accumulated under the Plan will be promptly returned
to the Participants.
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