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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, 1999 Commission file number 0 - 22804
ACTIVE VOICE CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1235111
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(State of incorporation) (I.R.S. Employer Identification Number)
2901 Third Avenue, Suite 500, Seattle, Washington 98121-9800
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(Address of principal executive offices, Zip Code)
(206) 441-4700
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(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. /X/
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based on the closing price on June 15, 1999, as reported by the
Nasdaq Stock Market was $48,313,340.(1)
The number of shares of the registrant's Common Stock outstanding as of June 15,
1999, was 4,588,862.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's 1999
Annual Meeting of Shareholders to be held on August 19, 1999, 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
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PART I PAGE
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Item 1. Business.......................................................................1
Industry.......................................................................1
Strategy.......................................................................3
Products.......................................................................4
Sales and Marketing............................................................7
Product Development...........................................................10
Manufacturing.................................................................10
Competition...................................................................11
Proprietary Rights............................................................12
Employees.....................................................................13
Item 2. Properties....................................................................13
Item 3. Legal Proceedings.............................................................13
Item 4. Submission of Matters to a Vote of Security Holders...........................13
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.......................................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.....................26
Item 8. Financial Statements and Supplementary Data...................................27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................44
PART III
Item 10. Directors and Executive Officers of the Registrant............................44
Item 11. Executive Compensation........................................................44
Item 12. Security Ownership of Certain Beneficial Owners and Management................44
Item 13. Certain Relationships and Related Transactions................................44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............44
SIGNATURES....................................................................50
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PART I.
ITEM 1. BUSINESS
Active Voice Corporation (Active Voice or the Company) is a leading manufacturer
of voice processing systems and PC-based computer telephony integration (CTI)
solutions, with more than 70,000 installations in virtually every kind of
business in over 60 countries. Active Voice develops technology that helps
businesses communicate better. Active Voice products are sold through a global
network of independent telecommunications dealers, telephone equipment
manufacturers, and computer resellers. Active Voice corporate headquarters are
located in Seattle, with representatives throughout the United States, as well
as offices in Australia, Canada, China, France, India, The Netherlands, South
Africa, Sweden, and the United Kingdom.
The Company's software and servers enable people to manage information and
communicate more effectively by integrating their traditional office telephone
systems (also known as telephone switches) with personal computers, the local
area network (LAN), and the Internet. Its products allow businesses to
incorporate telephony functions and PC-based unified messaging and desktop call
handling into their daily operations. This functionality includes such basic
applications as voice mail, and more advanced applications such as CTI. CTI
allows people to control all voice, fax, and e-mail messages, as well as inbound
and outbound telephone calls, and to control them visually using a personal
computer. The Company was one of the first voice processing manufacturers to
offer an integrated product that permits on-screen desktop management of the
entire spectrum of personal communications, and has continued to research,
develop, market, and distribute novel CTI solutions.
Founded in 1983, the Company was one of the pioneers of PC-based voice
processing and is now a recognized leader in CTI applications. The Company's
product philosophy originates from research performed at Massachusetts Institute
of Technology's Media Laboratory for Speech and Artificial Intelligence. The
Company believes its focus on comprehensive solutions that are both simple to
learn and easy to use, combined with its commitment to continued product
innovation, give it a competitive advantage in a dynamic industry.
INDUSTRY
According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers, whose voice messaging products
accounted for aggregate end user revenues of approximately $2.3 billion in 1998.
Manufacturers of voice processing systems include switch suppliers such as
Lucent Technologies, Inc., Nortel Networks Corporation and Siemens Business
Communication Systems, Inc.; independent manufacturers of proprietary systems
such as BayPoint Innovations, a division of Mitel Corporation, Octel
Communications - now a division of Lucent Technologies; and Comverse Technology,
Inc.; and independent manufacturers of PC-based, open-architecture systems such
as Active Voice and AVT Corporation. According to industry statistics for total
number of domestic voice processing systems shipped in 1998, the Company ranked
third only behind Lucent Technologies and Nortel Networks Corporation.
References in this paragraph, as 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
industries.
Traditionally, the term voice processing has referred to various ways to
facilitate interaction over the telephone between a caller, one or more persons,
and a computer. These systems were generally offered as stand-alone products by
different vendors and distributors and were based on expensive proprietary
hardware and software.
The first voice processing systems performed basic applications. The three most
common of these basic voice processing features are: 1) VOICE MAIL - which
allows a caller to store voice messages in a
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computer. Typical voice mail features include the ability to screen callers,
record, store, and delete messages, as well as to direct messages to multiple
subscribers. 2) AUTOMATED ATTENDANT - which allows a caller to direct the
computer to switch the call automatically to a telephone extension different
from the one dialed. 3) INTERACTIVE VOICE RESPONSE (IVR) which allows a
caller to obtain requested information in voice form from a local or remote
database. An example of IVR is simply selecting announcements from a list of
options stored in the computer (also known as AUDIOTEXT). These basic voice
processing functions offer integrated and simplified access to various types
of communications and information through the traditional telephone system.
As the demand to integrate communication technologies, lower product costs, and
reduce the time to market of new products increased, and as significant advances
in personal computer hardware and software were made, three trends developed
that facilitated the creation of more advanced messaging applications. The first
trend was a shift from proprietary hardware and software. As the costs of
personal computers and their operating systems decreased, it became more
economical for system developers to create scaleable, non-proprietary (also
known as open-architecture) products that used standard hardware and software.
Historically, the Company has focused its development efforts on open
architecture-based systems, an approach that has allowed the Company to take
advantage of rapid improvements in third-party hardware and software.
The second trend was a shift from central office, or centralized, computing
environments to client-server, groupware architectures that utilized a company's
local area network (LAN; also known as the Intranet) and the Internet. This
created demand for new communications solutions that would provide
communications networking between branch offices.
The third trend is the convergence of voice and data technologies. While voice
has traditionally been carried separately from data, the proliferation of the
Internet has led many industry watchers to conclude that voice traffic will soon
become a subset of the data now being carried on a larger data network. The
Company believes the union of voice and data traffic on a single network may
transform the office environment at a fundamental level.
As a result of these developments, voice processing systems now provide more
advanced functions that enable users to utilize voice, personal computers, and
touchtone telephones in different ways to manipulate calls, interact with
computer databases, and access and respond to messages or data. Examples of
advanced applications include the ability to visually manage all telephone
traffic from a personal computer, listen to voice messages using the PC speaker,
redirect voice messages with a mouse, use touchtones to route a fax or an e-mail
to the nearest facsimile machine for printout, and the ability to listen and
reply to e-mail messages over a telephone. The Company has developed products
that take advantage of these trends in the market, thereby making internal and
external communications more efficient.
In addition to developments in computer hardware and software, over the past
decade there has been a proliferation of new methods of business communication,
such as facsimile (fax), electronic mail (e-mail), and Internet telephony (the
ability to make voice phone calls over the Internet). These advances in
technology and communications infrastructure make it easier to exchange voice
and data using pagers, cellular phones, and portable computers with
communications capabilities. As a result, voice processing systems can now
access and interact with a wide range of communications devices, such as
cellular telephones and pagers. The creation of each new communications device,
accompanied by the integration of telephone systems with computers on an
Intranet or the Internet, give rise to the demand for innovative products to
streamline the message retrieval process and allow the user to access all
electronic messages using the most convenient communications device from
anywhere in a cost effective way.
The Company has responded to this market demand by developing unified messaging
products that store all messages in one location for access via any device or
application. Unified messaging means all messages are stored and maintained on a
groupware database with one single list of users for e-mail, fax, voice,
telephones, and computers-saving IS departments resources. The products take
advantage
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of groupware standards such as Internet-connectivity, scalability to very
large sizes, and automatic synchronization of messages between numerous
servers. The connectivity among various means of electronic communication
(the merging of data networks and telephones) is delivering to people more
choices of how and when they wish to access information.
STRATEGY
MISSION STATEMENT: Active Voice makes products that empower people to
communicate in the easiest, most efficient, and unified way. With Active Voice
open standards-based software running on its servers and PCs, an organization's
employees and customers can communicate all over the world, at any time, and
control multimedia messages (voice mail, e-mail, or fax mail) with whatever
medium (currently desktop and laptop computers, wired and wireless telephones,
and pagers) is the most convenient and preferred way.
The Company's strategy is to develop innovative, easy-to-use, cost efficient,
PC-based voice processing systems and computer telephony integration solutions
to offer integrated access to a broad range of communications with other people
and databases.
THE COMPANY'S STRATEGY IS BASED ON 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, operating systems and groupware, like Microsoft
NT, Exchange and BackOffice, DOS or OS2, rather than proprietary computer
hardware and operating systems. As a result, the Company can rapidly adopt new
PC-based technologies and capitalize on the substantial expenditures made by
third parties that 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 while continuing to add enhanced functionality.
MAKE PRODUCTS EASY TO USE, INSTALL, AND MODIFY. The Company strives to
maximize ease-of-use for the end user, the system manager, and the installer.
Some of the Company's products are designed to be "people-oriented," with
features that can be used readily without special training or manuals. For
example, companies can choose from numerous telephone user interfaces like
the Company's 1 FOR YES, 2 FOR NO-Registered Trademark- user dialogue which
gives first time voice mail users easy and immediate access to all of the
system's features or a legacy emulated telephone user interface whereby when
the Company's product replaces an existing voice mail system, no training is
required. Also, the Company programs into its products installation
procedures, screens, and menus that allow automatic configuration to over 200
different PBX, key system, and Centrex switches and enable the system manager
to modify features to meet user needs.
MINIMIZE DISTRIBUTION OVERHEAD. The Company achieves broad market coverage for
its products domestically and internationally, without the use of a direct sales
force, through a nationwide network of independent telephone system dealers, and
through strategic partners. With the emergence of CTI, the Company has utilized
an additional distribution channel -- the Value Added Resellers (VARs). These
experienced data professionals specialize in industry solutions and sell not
only servers, but also desktop software to businesses and offices. This
diversified distribution structure gives the Company exposure to the substantial
customer bases of these different types of organizations.
FOCUS ON SMALL- TO MEDIUM-SIZED OFFICES WITH COST COMPETITIVE SOLUTIONS; LARGER
OFFICES BY LEVERAGING OPEN STANDARDS. The Company's products are designed for
use by businesses and offices in a wide range of enterprises, including
manufacturing, retail, service, healthcare, and governmental institutions. 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 the small- to medium-sized
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businesses. The Company is also entering the larger end user market through
its relationships with strategic partners and is seeing interest from larger
businesses, including Fortune 500 companies interested in its strategy for
open standards and the direction the Company is headed with its research and
development efforts. The Company believes its strategic relationships will
play a significant role in its strategy to increase market share, as well as
provide opportunities for the Company to have a greater presence in the
larger end user market.
PRODUCTS
The Company's products offer a full range of voice mail and CTI solutions, from
basic through advanced applications, and have been designed to fit the
functional and financial needs of specific market segments. All Active Voice
products offer voice mail, automated attendant, audiotext, and fax mail features
and most require the assistance of a dealer or other trained installer to
configure them to the end user's telephone. The Company also offers vertical
market applications, switch integrations, fax products, replacement hardware,
and other miscellaneous items. The Company's products are utilized by a broad
variety of enterprises in manufacturing, retail, service, healthcare,
governmental, and institutional settings.
The Company offers six products: Unity-TM-, Repartee-Registered Trademark-,
Replay Plus-Registered Trademark-, Replay-Registered Trademark-, Lingo-TM-,
and a line of InSwitch products manufactured solely for some of its strategic
partners. The Company's voice processing products typically include the
following principal components: a PC compatible 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. To keep costs down, Lingo runs Company-designed
software on a proprietary platform. In addition, the Company's InSwitch
products run Company-designed software on a single board inserted inside the
telephone system.
The Company has developed software that enables most of its products to
integrate with more than 200 different PBX, key system, and Centrex telephone
switching systems from 70 different manufacturers. The Company's new product,
Unity, is engineered to handle streaming media and therefore integrates with
TAPI compliant and H.323 compliant IP based (IP-PBX) switches. The Company
believes this number of integrations represents approximately 90% of the
installed switches in the United States, and views its ability to integrate with
such a large portion of available telephone systems as one of its key
competitive advantages.
UNITY -- Unity is an NT Exchange-based communications server which features true
unified messaging where all messages share a common message store and address
database and delivers lower total cost of ownership benefits. Unity was released
to general availability on March 31, 1999 and represents the culmination of
three years of research and development. Features include visual voice and fax
message management on Microsoft's Outlook application, unified administration,
an HTML system administration interface, and listening to textual e-mail via
text-to-speech. Designed from the ground up to integrate with the Microsoft
Exchange server, Unity uses NT's native 32-bit architecture, streaming media,
scaleability, networking, and LDAP (lightweight directory access protocol)
directory services to give its products a competitive advantage in the
marketplace. Unity integrates with numerous third-party fax providers. The
Company's subsidiary, Pronexus Inc., provides IVR software.
REPARTEE -- The Company's first product, Repartee, was introduced in 1986.
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 via a touchtone telephone that a specific fax be sent to the caller's
fax machine), call screening, e-mail messaging using text-to-speech conversion,
multi-office networking, and easy message access via touchtone telephone or
personal computer.
In February 1998 the Company released Repartee version 7.44. This release split
the product into two models, Repartee VP and Repartee CTI, and incorporated the
most powerful features of the Company's Replay and Replay Plus voice messaging
platforms. (For a discussion of Replay and Replay Plus, see below.) Both
Repartee VP and CTI run on IBM's OS/2 Warp 4.0 operating system, use Dialogic
voice
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boards and are available as a turnkey product (already assembled) or as a kit
that the dealer may assemble on site. Repartee's target market is small- to
medium-size businesses.
REPARTEE VP -- provides users with basic applications such as voice mail,
automated attendant, and fax capabilities from any touchtone telephone. It can
network remote sites, has multilingual capabilities, and can run the Company's
lodging industry software package, Hospitality. (For a discussion of
Hospitality, see below.) Repartee VP is available in two- and four-port
configurations, and offers up to 100 hours of storage.
To make it quicker and easier for users of the system to add optional software
packages, or to upgrade from Repartee VP to Repartee CTI, all software comes on
one CD-ROM, and is installed by purchasing a code from the Company and then
inputting it into the server. This seamless upgrade path from Repartee VP to
Repartee CTI, and the simplified process of adding software packages through the
use of upgrade codes, is a strategy the Company believes increases the product's
marketability.
REPARTEE CTI -- offers all the basic communications applications found in
Repartee VP, and also works with the Company's suite of computer telephony
integration software, known as TeLANophy-Registered Trademark-, to provide
users with advanced integrated messaging and call control applications. Users
with TeLANophy have the ability to access and manage all their messages
visually from a personal computer. TeLANophy allows the user to use the PC
mouse and keyboard to perform the functions normally done on the telephone
keypad. ViewCall-Registered Trademark- Plus 2.0, ViewMail-Registered
Trademark-, ViewMail for Microsoft Messaging, Message Integration for Novell
GroupWise, ViewFax-Registered Trademark-, and E-Mail Integration are all
modules of TeLANophy. The Company sees this multiple user interface as a
benefit to consumers, since it offers the ability to control their messages
in the most convenient way.
- - VIEWCALL PLUS 2.0 - allows users to see incoming calls on their
personal computer screens and manage multiple calls as they arrive. When
Repartee CTI routes a call to an extension, ViewCall Plus 2.0 alerts users with
visual and audio cues. With their PC mouse, users click on buttons to take
calls, ask callers to hold, take messages, or transfer calls to a different
extension. Additionally, ViewCall Plus 2.0's monitor feature allows the user to
listen to a voice message as it is being recorded by the caller and, if the user
wishes to speak to the caller, he or she can pull the caller out of voice mail
and transfer the call to his or her extension.
- - 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, as well as rewind, pause, and
fast forward them during playback.
- - VIEWMAIL FOR MICROSOFT MESSAGING (VMM) -- offers Microsoft Exchange and
Outlook users the benefits of unified messaging, including the ability to access
voice, fax, and e-mail messages from within one application. All messages are
stored in one inbox, eliminating the need to check messages in separate
applications. A user can save voice and fax messages indefinitely along with
e-mail in Exchange and Outlook folders, send voice and fax messages to an e-mail
address (even if the recipient does not have a voice mail system), and download
voice and fax messages to work with off line.
- - VIEWFAX -- gives a user graphical fax handling capabilities. With
ViewFax, users can send, receive, and manipulate faxes from any networked
personal computer. ViewFax displays the fax on the computer screen.
- - MESSAGE INTEGRATION FOR NOVELL GROUPWISE -- offers a universal
messaging center where a user can check GroupWise messages (e-mail, schedules,
appointments, and tasks) and Repartee CTI voice and fax messages in one mailbox
that can be accessed by telephone or desktop PC.
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- - TEXT-TO-SPEECH E-MAIL INTEGRATION - provides 24-hour retrieval and
response of e-mail over a touchtone telephone via synthesized speech.
Repartee CTI is scaleable from four to 96 ports and has up to 1,000 hours of
storage. Repartee CTI can also run on a Compaq server grade platform, which adds
enhanced computing power and fault-tolerance to Repartee.
Version 7.47 is currently shipping worldwide. Sales of Repartee accounted for
approximately 60% of the Company's fiscal 1999 revenue.
REPLAY -- In 1991, the Company introduced Replay to segment its target market
and appeal to more price-sensitive, smaller enterprises. A simple "plug and
play" voice processing product intended for small office settings, Replay
provides automated attendant, voice mail, audiotext, and facsimile capabilities.
Replay does not require a computer screen or keyboard, and most of the
installation is performed by the end user.
Replay runs on the Microsoft DOS operating system, and features an HTML
(hypertext markup language) system administrator interface that simplifies
installation and customization. With the HTML graphical interface, system
administration can be accomplished remotely via a corporate Intranet or the
Internet. Routine maintenance and modifications can also be done via modem.
Replay is currently offered to some strategic partners and in all the Company's
markets outside North America. Sales of Replay accounted for approximately 7% of
the Company's fiscal 1999 revenue.
REPLAY PLUS --The release of Replay was followed in 1992 by the introduction of
Replay Plus. Replay Plus offers all the functionality of Replay, including the
HTML system administration interface, as well as support for fax-on-demand,
Hospitality, and the ability to customize nearly all voice mail features. The
product runs on the Microsoft DOS operating system. Replay Plus is currently
offered in all the Company's markets outside North America. Sales of Replay Plus
accounted for approximately 7% of the Company's fiscal 1999 revenue.
LINGO AND LINGO XL -- In 1997 the Company released Lingo, a full-featured voice
mail system designed at a lower price point for small businesses, the market
segment the Company believes least penetrated by voice mail products. The
Company strongly believes success in the small business market depends upon its
ability to deliver a product that offers powerful features while being
affordable, easy to use, install, and maintain. The Company feels Lingo fits
this profile.
Lingo is a turnkey product that offers voice mail, automated attendant,
audiotext, and fax detect, route, and notify capabilities from any touchtone
telephone. Lingo is a stand-alone unit that runs on an embedded PC-DOS operating
system. The product comes in two- or four-port configurations with two or four
hours of storage. In addition, Lingo is a solid-state system with no moving
parts; a design the Company believes reduces the possibility of product
malfunction while increasing its marketability. For customers who want more
voice storage capabilities, Lingo XL includes a hard drive providing 72 hours of
voice storage. The Company plans to increase the product's distribution on a
country-by-country basis during the calendar year 1999. Sales of Lingo accounted
for approximately 8% of the Company's fiscal 1999 revenue.
INSWITCH -- The Company manufactures a line of InSwitch products for one of its
strategic partners. An InSwitch product is comprised of software and hardware
incorporated directly into the telephone switch. Developing InSwitch products
allows the Company to leverage its core competency of software development to
deliver full voice mail functionality. Currently the Company's InSwitch software
ships on 65% of the specific NEC telephone system for which it was designed. The
Company is currently in negotiations with other manufacturers of telephone
systems to supply them with InSwitch products. Sales of InSwitch products
accounted for approximately 8% of the Company's fiscal 1999 revenue.
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OTHER PRODUCTS AND FEATURES
ACTIVEFAX -- gives users of Repartee and Replay Plus 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.
HOSPITALITY -- provides hotel guests with easy, timely and convenient messaging,
and is available in several multi-lingual guest conversation modules. Taking
advantage of its core product technology, the Company has developed this
specialized vertical market application for the lodging and hospitality
industry. Hospitality is designed to increase the efficiency of the hotel office
staff by providing unified messaging and on-screen call management.
Other optional features for the Company's products, such as tape backup, disk
redundancy and tool kits, are offered with Repartee and Replay Plus, and can be
configured by dealers according to a particular end user's application. Revenues
for other products and features accounted for approximately 6% of the Company's
fiscal 1999 revenue.
The Company does not presently customize its products for dealers or end users,
but does perform limited feature customizations as requested by certain
strategic partners.
PRONEXUS INC.
In January 1997, the Company acquired a majority interest in privately held
Pronexus Inc., a leading provider of Visual Basic (VB) voice application tools
that enable developers to quickly and easily create Windows NT-based,
interactive voice response applications. IVR allows people to access, manipulate
and process information from computer databases with any touchtone telephone,
even while away from the office. An example of IVR is conducting business with
the bank by using a touchtone telephone to transfer money from a savings to a
checking account, review account balances, or make payment on a credit card. The
Company believes its majority ownership of Pronexus will create synergies in
distribution channels, sales and marketing, and strategic partnerships and
enable the Company to provide additional enhanced features to its product base.
In addition, the Company considers the acquisition to be important for its
overall strategic plan for long term growth. The Company has the option to
acquire the remaining interest beginning January 2000 and expiring six months
thereafter. The amount paid for the remaining 49% will be based on a third-party
appraisal. Revenues from Pronexus accounted for approximately 4% of the
Company's fiscal 1999 revenue.
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 through
a nationwide network of more than 700 independent telephone system dealers, and
also through strategic partner arrangements with various manufacturers of
telephone systems and business equipment. While the Company supports its dealers
and strategic partners 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,
strategic partner, and VAR sales organizations, thereby achieving exposure to
the substantial installed customer bases of these organizations. A similar
distribution strategy is utilized by the Company for its international sales.
The Company has employees engaged in domestic and international sales, sales
management, and dealer and strategic partner support activities. The Company has
sales representatives in Australia, Canada, China, France, Germany, India, The
Netherlands, South Africa, Sweden, and the United Kingdom, and has distribution
relationships with dealers, distributors, or strategic partners in 42 other
foreign countries.
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The Company maintains an in-house marketing and public relations team. In
international markets, the Company has been experiencing a demand for larger
systems, and therefore has expanded its marketing and sales efforts to meet
these demands. Products are marketed principally by attending trade shows and
advertising in periodicals oriented toward dealers and end users. The Company
provides its dealers with marketing materials, and provides specialized
documentation to its strategic partners.
AMERICAS DEALER NETWORK
The Company's Americas dealer network consists of more than 700 independent
telephone system dealers in the United States, Canada, and Latin America. The
dealer network is managed by regional and divisional managers, who often
accompany dealers on sales calls and are compensated through a commission plan
based on quarterly quotas. 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 encouraged to attend initial Company-sponsored
training sessions on system usage, installation, maintenance, and customer
support. In addition, the Company provides advanced training on an ongoing
basis. Since the Company began selling Unity and TeLANophy, it has been
necessary to augment advanced training for its dealer network because the sale
and installation of Unity and TeLANophy requires both telephony and computer
networking expertise.
Dealers generally 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 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 sell competing products and are terminable by either party
on short notice.
STRATEGIC PARTNERS
The next major channel of distributing the Company's products is through 8
domestic and international strategic partners (historically known as original
equipment manufacturers or OEMs), who are typically manufacturers of telephone
systems, including NEC Corporation and its subsidiaries; Siemens Business
Communication Systems, Inc.; Alcatel; Executone Information Systems, Inc.;
Tadiran Telecommunications, Ltd.; Harris Corporation; and Philips Communication
Systems, B.V. NEC Corporation and its subsidiaries accounted for approximately
20% of the company's fiscal 1999 revenues.
The Company has had long term relationships with a number of these
manufacturers. It believes that its strategic partner relationships enable it to
develop up-to-date switch integrations with broader features for the strategic
partner's switches, to develop exclusive InSwitch products and to gain early
insight into market trends. In addition, by designing its products to take
advantage of the unique features of a specific strategic partner 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.
Strategic partners generally market the Company's products under their own brand
name, with their own literature, and through their own sales and technical
support networks. The Company will, however, supply strategic partners with
specialized technical publications featuring the strategic partner's company and
brand names. Strategic partner contracts typically have a term of one or more
years and provide for volume discounts and some product customization.
8
<PAGE>
In May 1999, the Company signed a master purchase agreement with NEC Corporation
which covers all of the Company's products sold to NEC and its affiliates. The
agreement provides uniform terms and conditions for all NEC affiliates globally,
including delivery and payment terms, and limited warranties. The initial term
of the contract is five years and automatically renews for one year terms
thereafter unless either party gives notice to the contrary. The contract may
also be terminated by either party for cause, including breach of a material
term, or the bankruptcy of or appointment of a receiver for the other party.
INTERNATIONAL SALES
In the last few years, the Company has increased its focus on international
sales and made substantial investments in expanding its penetration in
international markets. Competition has increased over the last few years,
primarily due to market acceptance and advances being made to change the
regulatory requirements and technology barriers that have characterized the
international marketplace. As international markets develop, the Company
believes that small- to medium-sized businesses will become more familiar with
voice processing and its benefits and therefore increase the demand for its
products' enhanced features and specialized applications. In addition, the
Company considers the current markets in Australia, Asia Pacific, and much of
Western Europe to exhibit characteristics similar to the U.S. market, but with
penetration in these markets being approximately two to three years behind the
domestic market. In these regions, generally only the large organizations have
installed voice processing systems, but product inquiries by potential customers
and distributors continue to increase. Although the Company believes that
smaller enterprises in most developed countries have the same needs for improved
telecommunications as in the U.S., it is difficult to predict the rate and
extent of demand for voice processing products in these markets.
In the last few years the Company has increased its research and development
efforts to localize its core products. 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 strategic partner, and the Company believes alliances with local
entities familiar with local telephone systems and local business conditions, as
well as hiring local employees, are important to successful penetration of most
foreign markets. The Company does, however, maintain a Globalization Group to
research and implement localization of its products. The Company's Repartee,
Replay Plus, and Replay products are currently available in 16 conversation-only
languages and dialects. Replay Plus and Replay are fully localized in four
languages. Foreign sales also frequently require governmental approvals of part
or all of the voice processing system, typically relative to electrical safety
and compatibility with that country's public telephone network, and local
telephone systems and equipment. To date, component approvals have been obtained
primarily by the voice board manufacturer.
VALUE-ADDED RESELLERS (VARS)
The greater technical complexity of CTI products and the need for both PC, LAN,
and IP-PBX technical knowledge and support capability has made it advantageous
for the Company to utilize new channels of distribution for these products. The
Company currently has a VAR agreement with Inacom Corporation, a technology
management services company, and an agreement with Ingram Micro, Inc., a
wholesale distributor of technology products and services. Because the Company's
new product, Unity, works in an IP-PBX environment, the Company has begun to
market its products to data VARs that resell those IP-PBX switches. These new
channels offer industry and technical solutions and provide both LAN and
software expertise, the Company believes they have the ability to assist the
Company in selling and distributing its products to a new and much broader
audience.
PRODUCT SUPPORT
The Company's dealers and strategic partner 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 and sales support to
its dealers and strategic partner customers. The Company maintains a technical
support staff, devoted to dealer and strategic partner support. Technical
support
9
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can be reached on a toll-free number 12 hours per day on weekdays and
emergency support is available on weekends and holidays. The Company also
provides a limited warranty on elements of its products and permits product
returns, without charge, if within 30 days. The Company offers installation
and maintenance contracts for its Unity offering.
PRODUCT DEVELOPMENT
The Company believes that it has numerous product development opportunities,
which it intends to pursue through the development of new software products, and
enhancements to its existing products. The Company considers its current
products to be competitive with products offered by others in its industry
segment. Nonetheless, it is convinced that it must continue to make substantial
expenditures on research and development in order to maintain its competitive
position. The Company has not to date capitalized any of its software
development costs.
Three engineering groups perform the Company's product development efforts. The
NT Products Group responds to the needs of the high-end product offering, Unity.
The DOS/OS2 Products Group supports Repartee, TeLANophy, Replay Plus, Replay,
Lingo and InSwitch products, as well as switch integrations and vertical market
applications. The Advanced Products and Technology group focuses on the
development of new products and features that the Company believes will be
important on a three to five year horizon.
A separate staff of engineers is devoted to product testing and quality
assurance. Voice processing systems are often considered crucial 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. The Company believes that the ongoing
research within its various business groups assures the continued high
reliability of its current and future products. To date, the Company has not
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 voice boards.
The Company's products incorporate a number of commercially available
application cards, fax boards, voice boards, and other circuitboards that enable
integration with certain telephone systems. Voice boards are available in
quantity from very few domestic suppliers. Traditionally, 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 also offers some products that incorporate voice boards manufactured by
Bicom, Inc., an alternate supplier. The Company purchases the hardware component
of its Lingo product from Santa Barbara Connected Systems Corporation.
To minimize its manufacturing costs, the Company signed an agreement with Dell
Computer Corporation to ship the Company's turnkey voice processing systems on
Dell computers.
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<PAGE>
COMPETITION
The voice processing industry, specifically the segment that supplies voice
processing systems to small- and medium-sized businesses and offices, is highly
competitive, and the Company believes that the competitive pressures it faces
will continue to intensify. The Company has, however, been successful in this
competitive environment in the past, ranking third behind only Lucent
Technologies and Nortel Networks Corporation total domestic voice messaging
systems shipped in 1998, according to industry statistics.
According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers. Manufacturers of voice processing
systems include switch suppliers (such as Lucent Technologies, Inc., Nortel
Networks Corporation, and Siemens Business Communication Systems, Inc.);
manufacturers of proprietary systems (such as BayPoint Innovations, and Comverse
Technology, Inc., which completed its merger with Boston Technology in January
1998); and independent manufacturers of PC-based, open-architecture systems
(such as the Company and AVT Corporation).
The segment of the industry that supplies voice processing systems to small- and
medium-sized businesses and offices has endured intense price competition and
pressure on margins in the past few years. This industry segment has also
experienced several new market entrants and consolidations of smaller
competitors into larger entities.
For interconnect dealers, 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. For strategic partner and VAR customers, product pricing is important
but other factors such as product quality and reliability, ease of use, and
support are also significant competitive factors.
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. The Company's principal competitors, at
present, fall into two main categories: telephone equipment manufacturers and
independent voice processing system manufacturers. The telephone equipment
manufacturers offer their voice processing products, or a private label
strategic partner system not produced by the Company (for example Lucent
Technologies, Nortel Networks Corporation, Fujitsu Business Communications, and
Toshiba America Information Systems, Inc.), and sell the systems along with
their PBXs. Telephone equipment manufacturers have the benefit of the large
installed-base of their own switches, and they have been able to increase
competition by lowering prices while providing a single source for companies to
secure both their voice processing and telephone systems needs.
Independent voice processing system manufacturers whose products integrate with
multiple telephone systems, and are either based on proprietary hardware (e.g.,
Centigram Communications Corporation, and Comverse Technology, Inc. ), or are
PC-based, (e.g., AVT Corporation), also compete directly with the Company. The
Company believes that it competes successfully in the industry because of the
richness and ease of use of its product features; its dynamic system
applications and capabilities, including leading edge CTI applications; its
strong dealer and strategic partner networks; and its large investments in
research and development.
The same principal competitors are encountered in all the Company's distribution
channels. The Company's strategic partner 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 strategic partner relationships with any RBOCs.
11
<PAGE>
Since many of the voice processing industry technologies overlap, mergers and
acquisitions have become more prevalent in the industry, particularly in the
last couple of years. There are many advantages to be gained from the synergies
created by these combinations, including the offering of a more complete product
suite to end users, combining research and development budgets and products,
convergence of prior competing sales channels, and consolidation of capital
investments and operating costs. The Company evaluates opportunities to acquire
complementary technologies on an ongoing basis.
PROPRIETARY RIGHTS
The Company currently holds ten patents (nine in the U.S. and one in Canada),
expiring on dates ranging from 2008 to 2016 relating to: (1) detection of
telephone signaling tones; (2) detection of stutter tones for CO-based voice
mail (this patent has also been issued in Canada); (3) a method and apparatus
for processing a live incoming call in a communications system (this covers two
patents, one for the ability to select a greeting that is played to the caller,
and the other for call forwarding capabilities); (4) a configurable telephone
interface for electronic devices; (5) a method for displaying call notification
and allowing choice of greetings to send to a caller; (6) a method for
displaying visual voice mail features and permitting playback of a voice mail
message on a PC sound device; (7) a method for monitoring a caller's name while
using a telephone; and (8) a method for monitoring a message as it is being left
in voice mail.
In general, however, 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. 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 as well as obtaining confidentiality agreements.
The Company cannot guarantee that its efforts to protect its intellectual
property will be effective to prevent misappropriation, reverse engineering, or
independent development by competitors.
The Company has initiated actions to enforce certain patent rights against third
parties. To date, the Company has granted four nonexclusive, nontransferable
licenses under its stutter detect patent. The Company does not believe that
licensing revenues will have a material effect on its financial condition;
nevertheless, it considers it important to protect its intellectual property and
assert its position in the highly competitive market.
In the course of its product development efforts the Company periodically
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, but there can be no assurance
that any particular license will be available at all, or available on acceptable
terms, at any future time.
The voice processing industry is witnessing numerous allegations of patent
infringement among competitors, and considerable related litigation. The Company
has received claims of patent infringement from several parties, including
certain competitors. In response to certain 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.
The Company's investigation of other 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 on valid patents. Although the Company believes that it
currently owns or has
12
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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, TeLANophy, ViewMail, ViewCall, and ViewFax are
registered trademarks, while Unity, ActiveNet, PhoneBASIC, and Lingo 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, 1999, the Company had 319 full-time employees, including 38 in
finance and administration, 32 in manufacturing, 127 in engineering, product
development, and quality assurance, and 122 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 non-competition 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.
At March 31, 1999, Pronexus Inc. had 25 full-time employees, including 2 in
finance and administration, 12 in engineering and product development, 11 in
sales, marketing and technical support, as well as 1 part-time employee.
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 July 2009. Sales offices in Australia, The Netherlands and the
United Kingdom are located in leased facilities under leases expiring in May
2003, March 2003 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 subject to legal proceedings or claims, either asserted or
unasserted, that arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that any pending legal matters will have a material adverse effect on the
Company. See also Note 9 of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 names, ages and current positions of the individuals
serving as executive officers of the Company at March 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert L. Richmond 48 Chairman of the Board
Frank J. Costa 46 Chief Executive Officer and President
Jose S. David 42 Chief Financial Officer
Douglass S. Anderson 48 Vice President of Sales
Kevin L. Chestnut 44 Chief Technology Officer and Vice President -- Advanced Products
and Technology
Edward F. Masters 40 Vice President of Product Development
- --------------------------------------------------------------------------------------------------
</TABLE>
Robert L. Richmond, a co-founder of the Company, has been Chairman of the Board
of the Company since its inception in 1983. Until June 1999, he also served as
its Chief Executive Officer. 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.
Frank J. Costa joined the Company in December 1996 as Chief Operating Officer
and President and was appointed Chief Executive Officer on June 1, 1999. From
June 1994 to November 1996, Mr. Costa was the President and Chief Executive
Officer of his own consulting firm, Concept One, Inc. Mr. Costa has also served
as the General Manager and Product Group Vice President of Mentor Graphics
Corporation from January 1993 to June 1994. Mr. Costa has a Bachelor of Science
degree in Electrical Engineering from Massachusetts Institute of Technology and
a Masters of Business Administration in Finance, Business Policy and
International Business from the University of Chicago.
Jose S. David joined the Company in 1989 as Controller and Manager of Operations
and was named Chief Financial Officer in July 1992. Mr. David serves on the
board of directors of its subsidiaries. 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 LLP, 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.
Douglass S. Anderson joined the Company in 1989 as National Sales Manager and
was appointed Vice President of Sales in July 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.
Kevin L. Chestnut joined the Company in 1991 as a Technical Writer and was
appointed Chief Technology Officer and Vice President - Advanced Products and
Technology in December 1997. From 1981 to 1990, Mr. Chestnut was Director of
Software Development of Real Estate Software Company, Inc., a software startup
company that he founded. Mr. Chestnut attended Georgia Institute of Technology,
majoring in chemistry.
Edward F. Masters joined the Company in 1991 as Manager of Customer Engineering
and was appointed Vice President of Product Development in December 1996. Prior
to that, he served as a Product Marketing Engineer at TeleCalc from 1988 to 1991
and a Project Engineer at Flow Systems from 1982 to 1991. Mr. Masters holds a
Bachelor of Science in Industrial Technology from Western Washington University
and a Masters of Business Administration from Seattle University.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table shows for the periods indicated, the market sales price
range for the Company's Common Stock as reported by The Nasdaq Stock Market
(Nasdaq symbol ACVC).
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998
- -------------------------------------------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $14.00 $10.00 $13.75 $ 9.63
Second Quarter 10.88 6.50 15.25 11.25
Third Quarter 8.38 4.38 15.38 11.63
Fourth Quarter $11.38 $ 7.75 $15.25 $11.38
- -------------------------------------------------------------------------------------------------
</TABLE>
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,
1999, there were approximately 100 stockholders of record and approximately
4,000 beneficial owners of the Company's Common Stock.
At December 31, 1998, the Company had remaining net proceeds from its December
1993 initial public offering of $2,077,000. During the quarter ended March 31,
1999, the Company used $1,164,000 to fund its operating loss, leaving remaining
net proceeds of $913,000.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997(1) 1996 1995
- -------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $62,217 $53,151 $49,515 $45,138 $36,950
Operating income (loss) (6,522) (1,149) 2,569 6,871 6,845
Net income (loss) (4,969) 142 1,751 5,162 5,110
Earnings (loss) per share:
Basic $(1.07) $ 0.03 $ 0.38 $ 1.14 $ 1.15
Diluted $(1.07) $ 0.03 $ 0.38 $ 1.11 $ 1.11
Balance Sheet Data:
Working capital $18,246 $24,825 $22,489 $20,912 $12,147
Total assets 38,582 41,144 38,941 37,400 28,698
Total debt
Total stockholders' equity $28,968 $34,595 $34,084 $31,797 $25,450
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the impact of a $1,769,000 non-recurring charge for purchased,
in-process research and development in connection with the acquisition of a
majority interest in Pronexus Inc. that reduced earnings per share by $0.38.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, telephone equipment manufacturers and computer
resellers. The Company currently markets six principal products: Unity,
Repartee, Replay Plus, Replay, Lingo and InSwitch. Unity, the Company's most
recent product introduction, offers fully unified messaging, including single
point administration for e-mail, voice mail and fax mail user accounts, address
and distribution lists, and network configuration for the Microsoft Exchange
Server. Repartee, the Company's well established mid-market product comes in two
versions, CTI and VP. Repartee serves as the base for TeLANophy, a suite of CTI
application modules which provides complete call management and integrated
messaging capabilities. Replay Plus, the Company's mid-priced product, offers
most of the voice processing features found in Repartee with the exception of
the CTI functionality. The Company's Replay product provides basic voice
processing features at a price point attractive to the small business market.
Lingo offers all basic voice processing features in a single proprietary
hardware unit, and is an affordable solution for small businesses as it does not
utilize PC hardware and requires minimal dealer effort in its installation.
InSwitch, available only to the Company's strategic partners, combines Active
Voice software with a board that incorporates directly into the phone switch,
offering a less expensive alternative than a traditional PC-based voice mail
system.
CERTAIN STATEMENTS IN THIS ANNUAL REPORT (FOR EXAMPLE, STATEMENTS USING THE
EXPRESSIONS, "THE COMPANY BELIEVES" OR "THE COMPANY ANTICIPATES" AND OTHER
SIMILAR STATEMENTS) CONTAIN "FORWARD LOOKING" INFORMATION (AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) INVOLVING RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, PROJECTIONS FOR SALES AND
EXPENDITURES, TREND PROJECTIONS AND DEVELOPMENT SCHEDULES. 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. INVESTORS ARE ENCOURAGED TO CONSIDER THE
RISKS DETAILED IN THOSE FILINGS. THE COMPANY ASSUMES NO OBLIGATION TO RELEASE
PUBLICLY ANY CHANGES TO THESE "FORWARD LOOKING STATEMENTS" THAT MAY ARISE FROM
THE DEVELOPMENT OF UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER THE
DATE OF THE ORIGINAL PROJECTION. (REFER TO THE SECTION ENTITLED "FACTORS
AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION ON SOME OF THE
INVOLVED RISKS AND UNCERTAINTIES.)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET SALES
1999 Change 1998 Change 1997
- ------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $62,217 17.1% $53,151 7.3% $49,515
- ------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales to the Company's Americas dealer network during the year ended March
31, 1999 increased 2.5% when compared to the previous year. Net sales to the
Americas dealer network represented 50.9% and 58.1% of total net sales in the
years ended March 31, 1999 and 1998, respectively. The decrease in net sales in
the Americas dealer channel as a percentage of total net sales is attributable
to the continued success of the Company's strategic partner relationships as
some dealers purchase the Company's products through these partners rather than
directly from the Company. The Company feels this is an efficient method of
distributing its basic voice mail products, due to lower distribution and
product support costs. The increase in overall revenue in the dealer channel
when compared to the prior year is attributable to the incremental sales
provided by the Company's Year 2000 (Y2K) program, which provides discounts to
dealers who upgrade their customers' non-Y2K compliant systems. To a lesser
extent, the introduction of new switch integrations and additional features for
Repartee, and the first full
16
<PAGE>
year of sales of the Lingo product, also contributed to the revenue increase
in the channel. During the fourth quarter of the fiscal year ended March 31,
1999 the Company released Unity 2.0 to general availability for all
customers. Revenues from Unity were not material for the year ended March 31,
1999.
Net sales to the Company's corporate sales channel increased 55.9% during the
year ended March 31, 1999 over the comparable period in the prior fiscal year.
Net sales to corporate sales customers represented 30.9% and 23.2% of total net
sales for the fiscal years 1999 and 1998, respectively. InSwitch and
Repartee/Replay Plus product revenues accounted for the majority of the increase
in net sales to corporate sales customers. InSwitch was introduced during the
second half of fiscal year 1998 and the benefit of a full year's sales in fiscal
1999 resulted in a five-fold increase in InSwitch revenue. Sales of the InSwitch
product benefited from the success of NEC's ElectraElite switch sales, a high
percentage of which are now sold with voice mail. In fiscal 1999, the corporate
sales channel also experienced growth in Replay/Lingo product revenue, and year
over year revenue from all major strategic partners increased. The Company
reached an agreement with Alcatel in the quarter ended March 31, 1999 to jointly
develop and deliver a fully customized Unity-based product to Alcatel customers.
As of March 31, 1999 the Company had 8 significant strategic partner
relationships. The largest corporate customer represented 65% of total corporate
sales, and 20% of total Company net sales.
Net sales to international customers grew 11.2% in the year ended March 31, 1999
when compared to the prior fiscal year. International sales represented 14.2%
and 14.9% of total net sales for fiscal years 1999 and 1998, respectively. The
increase in international sales can be partially attributed to the success of
the international rollout of the company's Lingo product, particularly in the
United Kingdom and Australia/Pacific markets. In addition, the Company has
continued to successfully supply Replay systems to Crane in the United Kingdom.
The Company's sales in the Asia/Pacific region continued to struggle due to the
effects of the weak Asian economy in the first half of the year but began to
improve during the second half of fiscal 1999. The Company continues to see the
positive results of its product localization efforts for various European
countries, as evidenced by the increase in Replay and Replay Plus units shipped
there. The Company continues to increase its volume of business with Phillips,
and anticipates further development of this relationship with the release of an
InSwitch product to Phillips in fiscal 2000. Recent developments in the
international channel include the opening of new sales offices in South Africa
and Sweden. Beyond the usual risks associated with international 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.
Other revenue comprised 4.1% of the Company's fiscal 1999 net sales, compared to
3.8% in fiscal 1998. This increase primarily represents revenue contributed from
the Company's Pronexus subsidiary, which grew 50% in fiscal 1999 compared to the
prior fiscal year.
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 1998 COMPARED TO FISCAL 1997
Effective April 1, 1998, the Company's South and Central American customers,
which were previously under the umbrella of international sales, joined with the
North American dealer channel to create the "Americas" dealer channel. Due to
the rearrangement of the sales channels and the desire to offer consistent data
when compared to the prior year's Form 10-K, the 1997 figures are not directly
comparable to the 1999 figures. However, the 1998 numbers have been restated to
reflect the change in the Americas channel in the "Fiscal 1999 Compared to
Fiscal 1998" narrative, but the 1998 numbers were not restated in the "Fiscal
1998 Compared to Fiscal 1997" discussion. This allows the relationships to be
examined by comparing fiscal 1999 to 1998, and fiscal 1998 to 1997.
17
<PAGE>
Net sales to the Company's North American dealer network during the year ended
March 31, 1998 declined 10% when compared to the previous year. Net sales to the
North American dealer network represented 57.5% and 68.5% of total net sales in
the years ended March 31, 1998 and 1997, respectively. The decrease in sales to
the North American dealer channel as a percentage of total net sales is
partially attributable to a shift in the distribution of the Company's low end
products to the corporate sales channel. The decrease can also be attributed to
the delayed release of Repartee VP and CTI in the fourth quarter of fiscal 1998.
As a result, the Company discounted certain interim sales of Replay and Replay
Plus products, which were phased out in this channel with the introduction of
Repartee VP and CTI. The delay also caused customers to defer orders in
anticipation of the new Repartee product offering. It is anticipated that the
standardization of the code base offered by Repartee VP and CTI will simplify
the product offering by establishing a consistent feature set and the ability to
offer more telephone switch integrations. This transition also allows the
Company to offer TeLANophy capability to every Repartee product sold in the
channel. The introduction of Lingo helped to mitigate the overall revenue
decline; of the 236 new dealers the Company added in fiscal 1998, 26 were
specifically devoted to selling Lingo.
Net sales to the Company's corporate sales channel increased 38.5% during the
year ended March 31, 1998 over the prior fiscal year. Net sales to corporate
sales customers represented 23.2% and 18.0% of total net sales for the fiscal
years 1998 and 1997, respectively. A greater than 270% increase in the unit
sales of Repartee was a significant factor in this year over year change. The
release of the high unit volume InSwitch product during the third quarter of
fiscal 1998 more than offset the year over year decline in Replay systems
revenue. In the fourth quarter of fiscal 1998, the Company successfully launched
Lingo to a strategic partner, broadening the product offerings in the channel
and contributing to the increase in revenue. The Company also reached an
agreement with Ingram Micro in the quarter ended March 31, 1998 to distribute
Repartee and Lingo, and to develop a sales channel for the release of the
Company's forthcoming NT-based product. As of March 31, 1998 the Company had 9
significant strategic partner relationships. The largest corporate customer
represented 50% of the channel's sales, and 11% of total Company revenue during
the year ended March 31, 1998.
Net sales to international customers grew 28.7% in the year ended March 31, 1998
when compared to the prior fiscal year. International sales represented 15.6%
and 13.0% of total net sales for fiscal years 1998 and 1997, respectively. The
increase in international sales can be attributed to the evolution of the
Company's international strategy towards a decentralized approach, providing the
local sales managers the latitude to take advantage of the unique opportunities
in their markets. The acquisition of Active Voice B.V., the Company's European
distributor, in September 1997 allowed the Company to improve its responsiveness
to its European customers. The Company continued to invest in product
localization efforts, especially in the German and French markets. The
international channel also experienced an increase in revenue from Replay,
offset by declining unit sales of Repartee systems and kits. The strength of the
US currency, particularly relative to the Australian dollar, mitigated some of
the overall increase in international revenues.
Other revenue comprised 3.7% of the Company's fiscal 1998 net sales, compared to
0.5% in fiscal 1997. This increase primarily represents revenue contributed from
the Company's Pronexus subsidiary, acquired in January 1997. The Company also
recognized revenues for the receipt of patent license fees related to the
Company's stutter detect patent.
<TABLE>
<CAPTION>
GROSS PROFIT
1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Gross profit $33,382 10.6% $30,195 4.9% $28,780
Percentage of net sales 53.7% 56.8% 58.1%
- ---------------------------------------------------------------------------------------------
</TABLE>
The Company's gross margin varies in part depending upon the mix of
higher-margin voice board-and-software kit sales (offered to all customers) and
software-only sales, such as InSwitch
18
<PAGE>
(available only to strategic partner accounts) as opposed to turnkey system
sales (which include the cost of a PC and other related hardware). The
proportion of sales contributed from each distribution channel also affects
the overall gross margin, as international sales have historically had higher
gross margins than sales through the other distribution channels.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenue from the Company's Y2K upgrade program has contributed to the reduction
of the overall gross margin percentage in comparison to the prior fiscal year.
The PC hardware components of the Company's products carry a lower gross margin
percentage, and the PC hardware component is greater under the Y2K program than
in the Company's non-Y2K business. Another factor contributing to the decline is
the continuing shift of a larger portion of the Company's revenue through the
strategic partner channel, which has resulted in increased unit volume at the
expense of higher margin percentages. Specifically, the Company's Lingo sales,
which contributed a higher proportion of margin dollars in fiscal 1999 than the
prior fiscal year, but at a lower gross margin percentage, also accounted for
the decline in gross margin percentage between the comparable periods. The
overall decline has been partially offset by the Company's InSwitch product,
which carries a higher software component than traditional turnkey system sales.
FISCAL 1998 COMPARED TO FISCAL 1997
The decline in gross margin between fiscal 1998 and 1997 is attributable to a
variety of factors, particularly product platform changes that required the
Company to increase allowances for excess and obsolete inventory in the second
and fourth quarters of fiscal 1998. In addition, the Company wrote off the value
of unreturned out-of-warranty items and certain demo units. Also, in the fourth
quarter Replay and Replay Plus units were discounted in preparation for the
Repartee 7.44 transition. The margin decrease related to the transition was
offset by margin gains in the strategic partner channel with the third quarter
release of the InSwitch product, as well as a 58% overall increase of TeLANophy
sales. Other factors mitigating the margin decrease included the settlement of
third-party vendor hardware problems as well as recognition of patent license
fees related to the Company's stutter detect patent.
<TABLE>
<CAPTION>
RESEARCH AND DEVELOPMENT
1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Research and development $14,450 48.2% $9,752 44.3% $6,757
Percentage of net sales 23.2% 18.3% 13.6%
- ---------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
The acceleration of the development effort associated with the Company's Windows
NT-based product, Unity, resulted in the majority of the fiscal year 1999
increase in research and development expenses over the prior fiscal year. The
substantial development resources required to build a native NT unified
messaging product from the ground up necessitated the dollar growth in research
and development expenses. The Company does not capitalize software development
costs. As the development expenditures associated with Unity, which was released
at the end of the fourth quarter of fiscal 1999, were in advance of actual
product revenues, the research and development expenses as a percentage of sales
also increased. Contract development staff and employee compensation-related
expenses were the largest components of the increase. A one-time bonus in the
fourth quarter of fiscal 1999 was awarded to the Unity development staff for
meeting the product's targeted release date, and accounted for approximately 9%
of the incremental expenses. The customization of products for the Company's
strategic partners and the ongoing globalization of products for international
markets also contributed to the increase. In addition, the competitive nature of
the labor market and the Company's effort to attract and retain skilled
employees has led to an overall increase in engineering salaries.
19
<PAGE>
The Company 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, globalization of
products for international markets and customization of products for strategic
partners. 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 1998 COMPARED TO FISCAL 1997
The increases in research and development expenses, both in dollar amount and as
a percentage of net sales between the fiscal years ending 1998 and 1997 were
primarily attributable to an increase in compensation-related costs associated
with additional engineering and development personnel and project-based contract
development staff and associated recruiting costs. The increase in engineering
personnel is attributable to the Company's development of new Windows NT-based
products as well as to the addition of Pronexus Inc. development staff. In
addition, engineering salaries have increased due to the competitive nature of
the labor market and the Company's effort to attract and retain skilled
employees.
Significant releases during fiscal 1998 included the Lingo and InSwitch
products, described above. The introduction of Repartee 7.44 in the fourth
quarter to the North American dealer network offers TeLANophy capability with
every Repartee system sold within the channel. The Company also developed and
announced version 2.0 of ViewCall-Registered Trademark- Plus, which takes
advantage of a powerful new scripting tool, PhoneBASIC-TM-. With PhoneBASIC,
ViewCall Plus 2.0 can be integrated to work with a variety of general
business applications.
<TABLE>
<CAPTION>
SALES AND MARKETING
1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Sales and marketing $17,349 12.5% $15,421 15.9% $13,301
Percentage of net sales 27.9% 29.0% 26.9%
- ---------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
The increases in sales and marketing expenses for the fiscal year ended March
31, 1999 over the prior fiscal year were primarily attributable to increased
compensation-related expenses associated with growth in sales and marketing
personnel and higher commissions due to increased sales levels. Leveraging these
additional expenses over a growing revenue base resulted in a decline in sales
and marketing expenses as a percentage of net sales. The increase in unit volume
has also caused expenses to be higher when compared to the prior year, as more
resources have been devoted to supporting a larger number of systems.
Furthermore, in preparation for the release of Unity, training expenses and
additional technical staff were necessary to strengthen the Company's product
support infrastructure. Sales and marketing expenses include both costs that are
essentially fixed as well as costs that vary from period to period relative to
sales volume and thus can be expected to fluctuate both in dollar amount and as
a percentage of net sales from period to period.
FISCAL 1998 COMPARED TO FISCAL 1997
Most of the increase in sales and marketing expense for the year ended March 31,
1998 when compared to the prior year is due to overall increased
compensation-related expenses and the addition of new personnel, particularly
technical and strategic partner support staff. The increase in technical support
personnel is attributable to the demand for network and desktop support
resources as a result of the product shift to Repartee and CTI offerings. A 23%
increase in unit volume has also caused expenses to be higher when compared to
the prior year, as more resources have been devoted to supporting a larger
number of systems. Trade show expenditures and other promotional efforts also
increased in an effort to
20
<PAGE>
establish awareness of the new Lingo and Repartee 7.44 products, as well as
Pronexus' Visual Basic application tools.
<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE
1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
General and administrative $8,105 31.3% $6,171 40.8% $4,384
Percentage of net sales 13.0% 11.6% 8.9%
- ---------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
The majority of the increase in general and administrative expenses for the year
ended March 31, 1999 is attributable to higher compensation-related expenses.
Specifically, the Company added information system staff and devoted more
resources to internal workstation and network support. Depreciation associated
with the Company's continued investment in its management information system
infrastructure as well as higher software costs also contributed to the
increase. The Company's international general and administrative expenses also
increased when compared to the prior year, due to the acquisition of its
European distributor in mid-fiscal 1998, and to the conversion of its Australian
and UK offices from branch to subsidiary operations. General and administrative
expenses can be expected to fluctuate as a percentage of net sales from period
to period.
FISCAL 1998 COMPARED TO FISCAL 1997
Approximately two-thirds of the increase in general and administrative expenses
during the year ended March 31, 1998 can be attributed to increased headcount
and additional compensation-related expenses, and one-fourth the result of
increased consulting services. These additional expenses are primarily
associated with the Company's continued investment in its management information
systems infrastructure. Specifically, in fiscal 1998 the Company upgraded and
standardized many of its in-house computer systems and network equipment, as
well as implemented a new customer management software program. These increases
were partially offset by a reduction in the provision for doubtful accounts
receivable due to improved collection statistics.
NON-RECURRING CHARGE FOR PURCHASED, IN-PROCESS RESEARCH AND DEVELOPMENT
During January 1997, the Company recognized a non-recurring charge of $1.8
million for purchased, in-process research and development as a result of the
acquisition of a majority interest in Pronexus, Inc. See Note 12 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
INTEREST EXPENSE AND INTEREST INCOME
1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest expense ($103) 100.0%
Interest income $419 (26.8%) $573 (23.1%) $745
- ---------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
The Company incurred interest expense in fiscal year ended March 31, 1999 as it
borrowed against its line of credit to fund operations. The decrease in interest
income in the current year compared to fiscal 1998 was primarily due to lower
average invested cash and marketable security balances as the Company allowed
its investments to mature without reinvesting the proceeds. Average cash and
marketable security balances decreased due primarily to the Company's net loss.
See "Liquidity and Capital Resources."
21
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997
The decrease in interest income during fiscal 1998 was primarily attributable to
lower average invested cash and marketable security balances. Average cash and
marketable security balances decreased due to increased inventory holdings,
vendor prepayments and certain business combinations.
<TABLE>
<CAPTION>
INCOME TAX BENEFIT (PROVISION)
1999 Change 1998 Change 1997
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income tax $1,308 89.8% $689 (143.4%) ($1,587)
Effective tax rate 21.1% 119.6% (47.9%)
- ---------------------------------------------------------------------------------------------
</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 fluctuate in the future due to the impact of changing
research and development tax credits, tax exempt interest income, and foreign
sales corporation benefits as a percentage of taxable income. In addition, the
Company anticipates that its operations may fall under the jurisdiction of
additional taxing authorities as its operations continue to expand into new
geographical areas.
FISCAL 1999 COMPARED TO FISCAL 1998
Under Financial Accounting Standard No. 109, "Accounting for Income Taxes" (FAS
109), a deferred tax asset is recognized for deductible future temporary
differences. A valuation allowance against this asset is recognized if, based
upon the weight of the available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. FAS 109 requires
an assessment of all available evidence both positive and negative. Management
believes the Company will be able to realize net deferred tax assets in excess
of the valuation allowance because a significant portion of the operating loss
was generated by the deliberate investment in the development of the Unity
product ahead of planned revenues, prior to which the Company had a long and
stable history of earnings. However, there can be no assurance that the Company
will generate taxable income or that all of its deferred tax assets will be
realized.
The Company's effective tax rate decreased to 21.1% (benefit rate as a result of
pretax losses) in the fiscal year ended March 31, 1999. During the year the
Company exhausted all net operating loss (NOL) carrybacks. Any additional NOL's
will be carried forward, resulting in income tax benefits in future periods with
taxable income. As a result of the Company's pretax losses for the year ended
March 31, 1999, the Company will receive a refund of income taxes previously
paid.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's effective tax rate increased to 119.6% (benefit rate as a result
of a pretax loss) in fiscal 1998 from 47.9% in fiscal 1997. The significant
increase in the effective tax rate was primarily attributable to the Company's
small pretax loss in fiscal 1998. As the Company's operating results approach
the break-even level as in fiscal 1998, the tax benefits provided by tax exempt
income, the FSC and the research and development tax credit increase as a
percentage of the pretax operating result even though the absolute dollar value
of these benefits has not significantly changed.
22
<PAGE>
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
1999 Change 1998 Change 1997
- -----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net income (loss) ($4,969) (3,599.3%) $142 (91.9%) $1,751
Percentage of net sales (8.0%) 0.3% 3.5%
Earnings (loss) per share:
Basic ($1.07) (3,666.7%) $0.03 (92.1%) $0.38
Diluted ($1.07) (3,666.7%) $0.03 (92.1%) $0.38
- -----------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net income (loss) and earnings (loss) per share for the year ended March 31,
1999 in comparison to the corresponding periods in the prior fiscal year were
primarily attributable to the increased operating expenses, as discussed above
under the individual income statement captions. The Company believes these
investments are essential to prepare for new product direction and future
growth. These investments in the development, marketing and support of new
products are expected to continue into the next year. Furthermore, the declines
in gross margin as a percentage of net sales have also contributed to the
decreases in net income and earnings per share. The average number of common and
common equivalent shares outstanding during the two periods was comparable.
FISCAL 1998 COMPARED TO FISCAL 1997
Net income and earnings per share in fiscal 1998 decreased compared to 1997 due
primarily to increased operating expenses, as discussed under the individual
income statement captions. The Company believes these investments are essential
to prepare for new product direction and future growth. This investment in the
development of new offerings and distribution channels, and the individuals that
support them, is expected to continue throughout the next fiscal year.
Furthermore, the decline in gross margin percentage, combined with relatively
modest increases in sales volume to leverage over the added operating expenses,
has contributed to the decrease. The average number of common and dilutive
common equivalent shares outstanding during the two periods was comparable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities decreased to
$4.5 million, or 11.6% of total assets, at March 31, 1999 from $8.6 million, or
21.0% of total assets, at March 31, 1998. The decrease is due primarily to the
net loss. Cash flow used in operations totaled $0.8 million during the twelve
months ended March 31, 1999. The Company had net working capital of $18.2
million at March 31, 1999.
Accounts receivable, net of allowances, increased to $13.6 million at March 31,
1999 from $11.3 million at March 31, 1998. The increase in accounts receivable
balances was due to higher net sales in the fourth quarter of the current fiscal
year compared to net sales in the comparable quarter of the prior fiscal year.
Days' sales outstanding at March 31, 1999 declined approximately 8.5% from March
31, 1998. Inventory decreased to $5.9 million at March 31, 1999 from $10.1
million at March 31, 1998, reflecting the Company's continued efforts to
efficiently manage component stocking levels.
During the fiscal year ended March 31, 1999, the Company repurchased 160,000
shares of its common stock for approximately $1.1 million under previously
announced share repurchase programs. The Company made $2.8 million in capital
expenditures during the fiscal year ended March 31, 1999, compared to $2.5
million during the prior fiscal year. The majority of the capital expenditures
during the current year consisted of computer hardware and software used to
augment the Company's management information systems infrastructure, as well as
additions and upgrades of computer equipment for development personnel. The
Company currently has no specific commitments with respect to future capital
expenditures, but expects to acquire approximately $4.0 million in new capital
additions.
23
<PAGE>
The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. No borrowings were outstanding under this agreement as of March
31, 1999. The agreement expires on June 30, 1999. The Company is currently in
the process of negotiating a new financing agreement. In addition, subsequent to
March 31, 1999, the Company entered into an agreement with its largest customer
that provided a borrowing facility of up to $6.5 million. See Note 15 of Notes
to Consolidated Financial Statements.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations and the availability of
alternative financing arrangements will provide sufficient resources to finance
operations for at least the next year.
YEAR 2000 (Y2K)
An issue affecting the Company and others is the inability of many computer
systems and applications to correctly process date data in and between the
twentieth and twenty-first centuries. The Company formed task forces to
investigate the year 2000 readiness of its products and of its internal systems.
The Company has completed its assessment of the year 2000 readiness of its
internal business process systems and applications. The Company has received
assurances from the suppliers that the Company's most critical business process
systems and applications are currently or will be year 2000 ready by December
31, 1999. The Company believes that other internal systems are also year 2000
ready. The Company intends to continue monitoring its systems through the year
2000. The Company estimates that the total cost of replacement or upgrade of
internal systems replaced solely to achieve year 2000 readiness will be less
than $100,000, the majority of which has already been incurred.
The Company has also implemented programs to assist customers with older
versions of its products in obtaining year 2000 readiness by making software
upgrades or replacement hardware available and offering programs for migrations
to current product versions. The Company estimates that the costs of creating
software patches and administering its upgrade programs for customers will be
approximately $400,000, the majority of which has already been incurred. The
financial impact to the Company of the development and administration of the
upgrade programs has not been and is not anticipated to be material to its
financial position or results of operations in any given year. However, if any
customers do not make necessary modifications, conversions, migrations, or
upgrades, it could have a material adverse effect on the Company in the form of
legal costs or the loss of customers.
The Company has been served with three class action lawsuits, one in Alabama
state court, one in Indiana state court, and one in Massachusetts state
court, related to the alleged inability of the Company's products prior to
Repartee 7.44 to function properly with respect to the year 2000. The
plaintiffs in the suits seek to require the Company to remedy the alleged
defect in these products and also seek damages. The Company has filed its
answer in the suits in Alabama and Massachusetts. The Company believes that
the claims stated in the cases are without merit, that the cases are not
appropriate for class action, and the Company intends to defend itself
vigorously. However, due to the preliminary status of the proceedings, it is
not possible to predict the ultimate outcome of the cases or their financial
impact on the Company.
The Company has contacted its third-party suppliers to assess and seek
reasonable assurances concerning the year 2000 readiness of their products and
has contacted its primary suppliers concerning the year 2000 readiness of their
internal systems as well. The Company has received assurances from many of its
suppliers that their products and services are year 2000 ready, but has concerns
that some suppliers may be unable to control their supply chain and may
experience year 2000 interruptions. Because the Company has no control over
third parties' products, services or internal operations, the Company cannot
ensure year 2000 readiness by its suppliers. The Company is developing
contingency plans for third-party suppliers it believes may be at risk,
including qualifying alternative suppliers or increasing inventory levels prior
to January 2000. Because some products and services are highly proprietary, the
Company cannot ensure that acceptable substitutes will be available.
The Company has also requested and will assess any available information from
major customers concerning their internal year 2000 readiness. Because the
Company has no control over third parties'
24
<PAGE>
products, services or internal operations, the Company cannot ensure year
2000 readiness by its customers.
The Company has not determined the most likely worst case scenario for the
Company with respect to the year 2000 problem as it is still assessing the year
2000 readiness of its important business partners.
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain statements contained herein are dependent upon numerous factors,
circumstances and contingencies. The following factors, while not all inclusive,
could cause actual results to differ materially from historical results or those
anticipated:
- - Competitive pressure from new entrants to the CTI market, including large
software companies and telephone switch manufacturers with greater
resources, could adversely affect the Company's business. Introduction of
new products by the Company or its competitors and the extent of their
success or failure could produce significant fluctuations in market demand
for the Company's products.
- - Increasing price competition in the Company's marketplace could influence
the amount and timing of changes in the Company's prices to its customers,
and therefore negatively impact the Company's gross margins. Gross margins
may also either increase or decrease as a result of further shifts in
product mix depending upon the percentage of net sales contributed by
software only sales in comparison to turnkey system sales.
- - There can be no assurance that new products will not be delayed, resulting
in lost customers or allowing competitors to gain market share, or that
such products will be successful in the marketplace.
- - The extent and timing of new product development and the need or desire to
modify existing products may cause notable increases in research and
development spending. Increasing international sales may require notable
increases in development spending associated with localization of products
for foreign markets.
- - Additional operating losses in excess of management expectations may cause
the Company's existing cash and marketable security balances to be
insufficient to fund its operations. As a result, the Company may be
required to seek alternate sources of financing or may be required to abate
current expense levels. There can be no assurance that alternate financing
will be available on acceptable terms, or at all.
- - Risks that the Company, its suppliers, or its customers do not address any
year 2000 readiness issues in a timely or effective manner. See "Year 2000
Update" above.
- - If the Company experiences delays in shipments (whether it is due to delays
from customers or as a result of the timing of new product introductions by
the Company) in a given quarter, or if new order bookings do not meet
anticipated levels, substantial fluctuations in operating results will
occur. Frequently, these developments may not become apparent to the
Company until near or at the end of the quarter. In addition, changes in
the product and channel mix, and the timing of customer orders, will
continue to affect the variability of quarterly results of operations in
future quarters.
- - Dependence on continued sales to significant customers could have a
significant impact on the Company's operations as there is no assurance
that any particular customer will continue to purchase similar volumes of
the Company's products.
- - Risks associated with the Company's movement into the larger end user
market, such as product acceptance and demand and failure to attract
sufficient market share, could affect the Company's future performance.
- - Growth strategies involving acquisitions, strategic relationships, and
vendor relationships may encounter legal and/or unforeseeable business
risks beyond the Company's control.
25
<PAGE>
- - Risks associated with foreign operations such as gains and losses on the
conversion of foreign currencies to U.S. dollars; export-import
regulations; customs matters; foreign collection problems; and military,
political and transportation risks may significantly affect the company's
operating results. In addition, the Company's international sales involve
additional risks associated with governmental regulation, product
adaptation to local languages and switching systems, and uncertainties
arising from local business practices and cultural considerations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not use or hold any derivative financial instruments. The
Company is exposed to both foreign currency and interest rate risk, either of
which could have an adverse effect on the Company's results of operations,
financial position or cash flows. The Company has assets and liabilities
denominated in certain foreign currencies related to international sales,
distribution and support subsidiaries. The Company has not hedged its
translation risk on these assets and liabilities as the Company has the ability
to hold them for an indefinite period and does not expect that a sudden or
significant change in foreign exchange rates would have a material impact on
results of operations, financial position or cash flows. The Company generally
invests in high-grade commercial paper and municipal securities, which are
classified as available-for-sale, to minimize its exposure to interest rate
risk. The Company believes that the market risk associated with its marketable
security holdings is not material. See Note 2 and Note 11 of Notes to
Consolidated Financial Statements.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $62,217 $53,151 $49,515
Cost of goods sold 28,835 22,956 20,735
-------------- -------------- --------------
Gross profit 33,382 30,195 28,780
Operating expenses:
Research and development 14,450 9,752 6,757
Sales and marketing 17,349 15,421 13,301
General and administrative 8,105 6,171 4,384
Non-recurring charge for purchased,
In-process research and development 1,769
-------------- -------------- --------------
Total operating expenses 39,904 31,344 26,211
-------------- -------------- --------------
Operating income (loss) (6,522) (1,149) 2,569
Interest expense (103)
Interest income 419 573 745
-------------- -------------- --------------
Income (loss) before income taxes and
minority interest (6,206) (576) 3,314
Income tax benefit (provision) 1,308 689 (1,587)
Minority interest in (earnings) loss
of consolidated subsidiary (71) 29 24
-------------- -------------- --------------
NET INCOME (LOSS) $(4,969) $ 142 $ 1,751
-------------- -------------- --------------
-------------- -------------- --------------
EARNINGS (LOSS) PER SHARE:
Basic $(1.07) $0.03 $0.38
-------------- -------------- --------------
-------------- -------------- --------------
Diluted $(1.07) $0.03 $0.38
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,650 $ 1,550
Marketable securities 1,113 3,407
Accounts receivable, less allowances
of $1,700 ($1,515 in 1998) 13,622 11,331
Inventories 5,924 10,122
Income taxes receivable 741 652
Deferred tax asset 1,650 1,340
Prepaid expenses and other assets 3,215 3,103
------------------ -----------------
Total current assets 27,915 31,505
Marketable securities 1,701 3,680
Furniture and equipment, net 4,589 3,539
Other assets 4,377 2,420
------------------ -----------------
TOTAL ASSETS $38,582 $41,144
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,983 $ 3,931
Accrued compensation and benefits 2,500 1,256
Other accrued expenses 2,186 1,493
------------------ -----------------
Total current liabilities 9,669 6,680
Commitments
Minority interest (55) (131)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 2 million - none outstanding
Common stock, no par value:
Authorized shares - 10 million
Issued shares, including repurchased shares - 4,976,933 17,314 17,262
Retained earnings 13,907 18,996
Accumulated other comprehensive income 20 40
Less 395,153 repurchased shares (313,067 at 1998) (2,273) (1,703)
------------------ -----------------
Total stockholders' equity 28,968 34,595
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,582 $41,144
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(4,969) $ 142 $1,751
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,882 1,494 966
Provisions for accounts receivable 287 (155) 305
Deferred income taxes (306) (347) 5
Loss on disposal of equipment 60 49 39
Minority interest in earnings (loss) of
consolidated subsidiary 71 (29) (24)
Non-recurring charge for purchased,
in-process research and development 1,769
Changes in operating assets and liabilities:
Increase in accounts receivable (2,578) (766) (2,087)
Decrease (increase) in inventories 4,198 (3,113) (1,526)
Increase in prepaid expenses and other assets (2,394) (2,428) (1,643)
Increase in accounts payable 1,052 1,589 204
Increase (decrease) in other liabilities 1,946 (414) (715)
-------------- -------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (751) (3,978) (956)
INVESTING ACTIVITIES
Purchases of marketable securities (2,294) (5,072)
Proceeds from sales of marketable securities 4,258 9,006 7,026
Acquisition of business (467) (1,941)
Purchases of furniture and equipment (2,756) (2,492) (1,295)
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,502 3,753 (1,282)
FINANCING ACTIVITIES
Proceeds from employee stock option and stock
purchase plans 484 644 382
Repurchase of common stock (1,131) (416)
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (647) 228 382
Effect of exchange rate changes on cash
and cash equivalents (4) 5 8
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 100 8 (1,848)
Cash and cash equivalents at beginning of year 1,550 1,542 3,390
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,650 $1,550 $1,542
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
<TABLE>
<CAPTION>
Common Stock Accumulated
----------------------- Other Total
Net Shares Retained Comprehensive Repurchased Stockholders'
Outstanding Amount Earnings Income (Loss) Shares Equity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1996 4,554,945 $16,791 $17,319 $(16) $(2,297) $31,797
Issuance of shares upon
exercise of stock options 46,833 17 (44) 256 229
Issuance of shares to
employee stock purchase
plan 16,296 64 89 153
Tax benefit related to
employee stock plans 131 131
Comprehensive income:
Net unrealized gain on
marketable securities 19 19
Translation adjustment 4 4
Net income 1,751 1,751
-------------
Total 1,774
- -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 4,618,074 17,003 19,026 7 (1,952) 34,084
Issuance of shares upon
exercise of stock options 53,713 27 (160) 451 318
Issuance of shares to
employee stock purchase
plan 32,079 124 (12) 214 326
Tax benefit related to
employee stock plans 108 108
Repurchase of common stock (40,000) (416) (416)
Comprehensive income:
Net unrealized gain on
marketable securities 30 30
Translation adjustment 3 3
Net income 142 142
-------------
Total 175
- -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 4,663,866 17,262 18,996 40 (1,703) 34,595
Issuance of shares upon
exercise of stock options 3,750 1 (11) 22 12
Issuance of shares to
employee stock purchase
plan 74,164 42 (109) 539 472
Tax benefit related to
employee stock plans 9 9
Repurchase of common stock (160,000) (1,131) (1,131)
Comprehensive loss:
Net unrealized loss on
marketable securities (11) (11)
Translation adjustment (9) (9)
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net loss (4,969) (4,969)
-------------
Total (4,989)
- -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 4,581,780 $17,314 $13,907 $20 $(2,273) $28,968
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<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 CTI products. The Company's products are sold
worldwide through a global network of independent telecommunications dealers,
telephone equipment manufacturers and computer resellers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. Inter-company accounts and transactions have
been eliminated.
FOREIGN CURRENCY TRANSLATION
The local currency in the country of domicile is considered the functional
currency of the Company's foreign operations. Financial statements of foreign
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities and a weighted average exchange
rate for each period for revenues and expenses. Resulting translation
adjustments are excluded from net income and reported in accumulated other
comprehensive income.
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. Cash
equivalents are carried at amortized cost, which approximates fair market value.
MARKETABLE SECURITIES
Marketable securities are carried at market value. Market values are determined
based on quoted market prices on the balance sheet date. 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 the majority 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
32
<PAGE>
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. Depreciation is computed using
both accelerated and straight-line methods over the estimated useful lives of
the assets. Estimated useful lives are as follows: furniture and fixtures, seven
years; office and computer equipment, three to 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.
Effective April 1, 1998, the Company changed its method of depreciation for
furniture and equipment placed in service after March 31, 1998 from an
accelerated method to the straight-line method and shortened the estimated
useful lives of some computer equipment from five years to three years. The
Company changed its method of depreciation based on management's belief that the
straight-line method provides a better matching of revenue and expense and that
it is the predominant industry practice. Estimated useful lives of computer
equipment were shortened due to rapid technological obsolescence associated with
these assets. These changes did not have a material effect on the Company's
results of operations for the year ended March 31, 1999.
GOODWILL
Goodwill represents costs in excess of net assets of acquired businesses.
Goodwill is being amortized over periods ranging from three to five years, using
the straight-line method. The Company periodically assesses the carrying value
of its goodwill to determine if impairment has resulted in an excess of carrying
value over fair value. Amortization expense amounted to $229,000, $182,000 and
$24,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
REVENUE RECOGNITION
On April 1, 1998, the Company adopted AICPA Statement of Position 97-2,
"Software Revenue Recognition." Adoption of this standard did not result in a
material effect on the Company's results of operations, financial position or
cash flows for the year ended March 31, 1999. The Company's revenues primarily
consist of system sales and software licenses. System sales typically include
both software and hardware components. Software licenses consist of software
applications that operate on industry standard hardware that is available from
the Company and other vendors. Revenue from system sales and software licenses
is recognized upon shipment of the product to the customer. The Company accrues
estimated costs of technical support to customers, as the related revenues are
recognized.
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 $263,000,
$172,000 and $71,000 in advertising costs during the years ended March 31, 1999,
1998 and 1997, respectively.
STOCK-BASED COMPENSATION
The Company has elected to apply the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for
33
<PAGE>
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Compensation cost for stock options
is measured as the excess, if any, of the fair value of the Company's common
stock at the date of the grant, over the stock option price.
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 as well as operating loss and tax
credit carryforwards. Deferred income taxes have been recorded using the
liability method in recognition of these temporary differences.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of shares of common stock outstanding plus the net effect of
dilutive common stock equivalents outstanding during the period using the
treasury stock method. Common stock equivalents consist of employee stock
options.
COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Accordingly, unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments are reported as components of other comprehensive
income.
BUSINESS SEGMENTS
As of April 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Based on the criteria of
SFAS No. 131, the Company has determined that it has a single reportable
segment, computer telephony products.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments. The
Statement requires that entities recognize all derivatives as either assets or
liabilities on the balance sheet and measure these derivatives at fair value.
SFAS No. 133 also specifies a new method of accounting for hedging transactions,
prescribes the type of items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting. This Statement is
effective for financial statements for years beginning after June 15, 2000. The
Company does not expect the adoption of this Statement to have a material impact
on the Company's consolidated results of operations, financial position or cash
flows.
In March 1998, The AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use purposes. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not expect the adoption of this Statement to result in a material
impact to the Company's consolidated results of operations, financial position
or cash flows.
34
<PAGE>
NOTE 2. MARKETABLE SECURITIES
Management determines the appropriate classification of marketable 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. Accordingly, the securities are carried at
fair value, with unrealized holding gains and losses excluded from net income
and recorded (net of tax) in accumulated other comprehensive income until
realized. Interest, dividends, and realized gains and losses are included in net
income.
The following is a summary of marketable securities at March 31 (in thousands),
all of which are classified as available-for-sale:
<TABLE>
<CAPTION>
Gross
1998 Amortized Cost Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds:
Due in one year or less $1,107 $ 6 $1,113
Due after one year through three
years 1,673 28 1,701
- ----------------------------------------------------------------------------------------------------------
$2,780 $34 $0 $2,814
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross
1998 Amortized Cost Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds:
Due in one year or less $3,396 $11 $3,407
Due after one year through three
years 2,586 26 2,612
Due after three years 1,055 13 1,068
- ----------------------------------------------------------------------------------------------------------
$7,037 $50 $0 $7,087
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Net unrealized holding gains (losses) of $(11,000), $30,000 and $19,000, net of
federal income taxes were included in comprehensive income, during the years
ended March 31, 1999, 1998 and 1997, respectively.
NOTE 3. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $3,049 $5,494
Custom component parts 1,918 3,907
Supplies 957 721
- --------------------------------------------------------------------------------------------------------
$5,924 $10,122
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4. FURNITURE AND EQUIPMENT
Major classes of furniture and equipment are as follows (in thousands):
35
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office and computer equipment $7,134 $5,725
Furniture and fixtures 2,390 2,064
Leasehold improvements 587 331
- --------------------------------------------------------------------------------------------------------
10,111 8,120
Accumulated depreciation (5,522) (4,581)
- --------------------------------------------------------------------------------------------------------
$4,589 $3,539
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. LINE OF CREDIT
The Company has a $10 million revolving line of credit from a bank secured by
the Company's marketable securities portfolio. Borrowings under this agreement
bear interest at the bank's prime rate less .25% or at LIBOR plus 1.5%, at the
election of the Company. At March 31, 1999 and 1998 there were no borrowings
outstanding under this agreement. This agreement contains financial covenants
that require the Company to 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 June 1999.
NOTE 6. INCOME TAXES
Income (loss) before income taxes consisted of (in thousands):
<TABLE>
<CAPTION>
Year ended March 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(5,571) $(555) $3,363
Foreign (635) (21) (49)
- ------------------------------------------------------------------------------------------------------
$(6,206) $(576) $3,314
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
The benefit (provision) for income taxes, primarily related to U.S. federal
income taxes, is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes on income $1,003 $342 $(1,582)
Deferred income taxes 305 347 (5)
- ------------------------------------------------------------------------------------------------------
$1,308 $689 $(1,587)
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable allowances $ 578 $ 515
Inventory valuation allowances 233 128
Accrued compensation and benefits 292 187
Accrued royalties 318 182
Net operating loss and tax credit carryforward 885
Other items, net 229 328
- -------------------------------------------------------------------------------------------------------
Total deferred tax asset before valuation allowance 2,535 1,340
Valuation allowance (885)
- -------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,650 $1,340
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Company is required to establish a valuation allowance to reduce deferred
tax assets if, based on the weight of the available evidence, it is more likely
than not that some portion or all of the deferred tax
36
<PAGE>
assets will not be realized. In determining the need for a valuation
allowance, the Company is required to assess all available evidence, both
positive and negative. Management has determined that a valuation allowance
of $885,000 is necessary at March 31, 1999, which represents an increase of
$885,000 for the year ended March 31, 1999, attributable primarily to
uncertainties about the Company's ability to use net operating loss
carryforwards (NOLs) and tax credit carryforwards, including foreign NOLs.
Management believes the Company will be able to realize net deferred tax assets
in excess of the valuation allowance because a significant portion of the
operating loss was generated by the deliberate investment in the development of
the Unity product ahead of planned revenues, prior to which the Company had a
long and stable history of earnings. However, there can be no assurance that the
Company will generate taxable income or that all of its deferred tax assets will
be realized.
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. Reconciliation from the
U.S. statutory rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended March 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate 34.0% 34.0% 34.0%
Research and development credit 5.0 46.2 (4.5)
Tax exempt income 1.3 30.7 (6.6)
Foreign sales corporation benefit 2.1 18.9 (2.5)
Valuation allowance change (14.3)
Non-recurring charge for
purchased, in-process research
and development 18.1
Foreign losses providing no current
benefit (6.3)
Other items, net (0.8) (10.2) 9.4
- -------------------------------------------------------------------------------------------------------
21.1% 119.6% 47.9%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Net operating loss and tax credit carryforwards of $860,000 are available to
offset future U.S. federal taxable income through 2019. Foreign net operating
loss carryforwards of $1.1 million are available to offset future foreign
taxable income through 2004. The Company received net refunds of income taxes
previously paid totaling $0.9 million during the year ended March 31, 1999. The
Company made cash payments of income taxes, net of refunds received, of $0.2
million and $2.3 million during the years ended March 31, 1998 and 1997,
respectively.
NOTE 7. LEASE COMMITMENTS
The Company leases its facilities under operating leases with initial terms of 5
to 12 years. Certain leases contain renewal and escalation clauses and space
expansion provisions. The Company incurred $2.5 million, $1.7 million and $1.5
million of rent expense for the fiscal years ended March 31, 1999, 1998 and
1997, respectively.
Future minimum rental payments required per fiscal year under leases with
non-cancelable lease terms in excess of one year at March 31, 1999 are as
follows (in thousands):
37
<PAGE>
<TABLE>
- ------------------------------------------------
<S> <C>
2000 $ 2,807
2001 3,109
2002 3,065
2003 3,300
2004 3,353
Thereafter 18,476
- ------------------------------------------------
$34,110
- ------------------------------------------------
- ------------------------------------------------
</TABLE>
In connection with the execution of a lease and related amendments, the Company
prepaid rent by paying certain architectural and real estate fees and costs on
behalf of the lessor. The prepayments of $562,000 and $762,000 at March 31, 1999
and 1998, respectively, bear interest at the prime rate plus 2% and are included
in prepaid expenses in the accompanying consolidated balance sheets. The
prepayments are used to offset a portion of the monthly lease payments.
NOTE 8. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has stock option plans under which employees, officers and directors
may be granted options to purchase the Company's common stock. The majority of
the stock options are granted at or above fair market value, typically vest over
three to four years and expire ten years from the date of grant. At March 31,
1999 there were 1,540,702 shares of common stock reserved for future issuance
under existing stock option plans of which 568,472 shares represent options
available for future grant. Options which expire or are terminated revert back
to shares available for future grant with the exception of 49,625 options
outstanding from dormant plans.
Had compensation cost for stock option grants made in 1999, 1998 and 1997 been
determined using the fair value method consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the following pro forma amounts (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $(4,969) $142 $1,751
Net income (loss) - pro forma $(5,957) $(1,118) $ 988
Diluted earnings (loss) per share - as reported $(1.07) $0.03 $0.38
Diluted earnings (loss) per share - pro forma $(1.29) $(0.24) $0.21
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: risk free interest rates of
5.0%, 6.0% and 6.5%, respectively; expected volatility of 60%, 55% and 55%,
respectively; expected life of 5 years; and no dividends. The weighted average
fair value of options granted during the years ended March 31, 1999, 1998 and
1997 was $5.73, $6.56 and $6.42, respectively. Because the Statement No. 123
method of accounting has not been applied to options granted prior to April 1,
1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
A summary of the activity of the Company's stock options is as follows:
38
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
Exercise Price Exercise Price Exercise Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
April 1 815,791 $13.49 599,863 $13.82 449,464 $13.33
Granted 282,364 10.24 341,592 12.12 240,236 11.72
Expired (122,175) 19.23 (71,951) 15.30 (43,004) 13.03
Exercised (3,750) 3.23 (53,713) 5.92 (46,833) 4.88
- --------------------------------------------------------------------------------------------------------
Outstanding,
March 31 972,230 $11.87 815,791 $13.49 599,863 $13.82
- --------------------------------------------------------------------------------------------------------
Exercisable,
March 31 433,778 $12.86 300,754 $14.51 246,322 $13.37
- --------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Prices Options Life (Years) Price Options Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $ 9.99 150,436 8.0 $ 8.25 47,500 $ 6.82
10.00 - 11.99 541,931 8.5 11.29 171,359 11.39
12.00 - 13.99 138,125 7.5 12.41 102,858 12.24
$14.00 -$28.50 141,738 6.3 17.40 112,061 18.24
-------------------- -------------
972,230 7.9 $11.87 433,778 $12.86
- --------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The 1996 Employee Stock Purchase Plan (ESPP) allows employees the right to
purchase the Company's common stock on a quarterly basis at 85% of the lower of
the market price at the beginning or end of each three-month offering period.
Employee contributions to the ESPP totaled $472,000, $326,000 and $153,000 for
the fiscal years ended March 31, 1999, 1998 and 1997, respectively. Shares
issued pursuant to the ESPP totaled 74,164, 32,079 and 16,296 for the fiscal
years ended March 31, 1999, 1998 and 1997, respectively. At March 31, 1999,
27,461 shares were reserved for future issuance.
SHARE REPURCHASE
On March 18, 1997, the Company's Board of Directors authorized the repurchase of
up to 100,000 shares of the Company's common stock. An additional 200,000 shares
were authorized for repurchase on October 16, 1998. During the fiscal years
ended March 31, 1999 and 1998, 160,000 and 40,000 shares were repurchased at
total prices of $1,131,000 and $416,000, respectively.
CERTAIN TRANSACTIONS WITH CORPORATE OFFICERS AND OTHERS
The Company and two of its directors and principal shareholders, are parties to
an Amended and Restated Buy-Sell Agreement (the "Agreement"). Under the
Agreement, the Company is required to maintain $4.3 million 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.
39
<PAGE>
NOTE 9. LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings or claims, either asserted or
unasserted, that arise in the ordinary course of business. The voice processing
industry is witnessing numerous allegations of patent infringement among
competitors, and considerable related litigation. The Company has received
claims of patent infringement from several parties, including certain
competitors. In response to certain 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. The Company's
investigation of other 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 on valid 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. Royalty
expense on licensed technology was $360,000, $395,000, and $324,000 during the
fiscal years ended March 31, 1999, 1998 and 1997, respectively.
The Company also faces exposure to claims or potential claims pursuant to other
issues including employment related matters and issues related to the year 2000
readiness of its products. The Company has been served with three class
action lawsuits, one in Alabama state court, one in Indiana state court, and
one in Massachusetts state court, related to the alleged inability of the
Company's products prior to Repartee 7.44 to function properly with respect
to the year 2000. The plaintiffs in the suits seek to require the Company to
remedy the alleged defect in these products and also seek damages. The
Company has filed its answer in the suits in Alabama and Massachusetts. The
Company believes that the claims stated in the cases are without merit, that
the cases are not appropriate for class action, and intends to defend itself
vigorously. However, due to the preliminary status of the proceedings, it is
not possible to predict the ultimate outcome of the cases or their financial
impact on the Company.
In addition, the Company has minority investments in affiliates and suppliers
which are in some cases early stage companies which may or may not be
undercapitalized. The recoverability of these investments in some cases is
dependent upon the future viability of the related affiliate or supplier.
NOTE 10. 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).
The Company made discretionary matching contributions of $193,000, $96,000, and
$52,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
NOTE 11. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company distributes
its products through a global network of independent telecommunications dealers,
telephone equipment manufacturers and computer resellers. The Company's largest
customer accounted for approximately 28% and 12% of gross accounts receivable at
March 31, 1999 and 1998, respectively. Accounts receivable denominated in
currencies other than the US Dollar (primarily the Australian Dollar, Canadian
Dollar, Dutch Guilder and British Pound Sterling) comprised approximately 13%
and 14% of gross accounts receivable at March 31, 1999 and 1998, respectively.
The Company is not currently engaged in any significant foreign currency hedging
activities. The Company performs ongoing credit evaluations of its customers'
financial condition, and generally does not require collateral, but may require
alternative payment terms such as cash in advance,
40
<PAGE>
cash on delivery (COD) or letters of credit, when necessary. The Company
maintains reserves for credit losses and such losses have historically been
within management's expectations.
NOTE 12. ACQUISITION OF PRONEXUS INC.
On January 17, 1997, the Company acquired a 51% interest in Pronexus Inc.
(Pronexus) for a cash price of $1.9 million. In addition, the Company acquired
an option to purchase the remaining shares of Pronexus within 3.5 years from the
acquisition date. Pronexus, based in Ottawa, Ontario, develops and sells Visual
Basic voice application tools used to create Windows NT-based interactive voice
response applications. The Pronexus acquisition was recorded under the purchase
method of accounting, and accordingly, the results of operations of Pronexus for
the period from January 17, 1997 are included in the accompanying consolidated
financial statements.
In connection with the acquisition, $1,769,000 of the purchase price was
allocated to purchased, in-process research and development and expensed as a
non-recurring cost. Intangible assets associated with the acquisition are
amortized on a straight-line basis over a period of three years.
NOTE 13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except shares and per share data):
<TABLE>
<CAPTION>
Year Ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $(4,969) $142 $1,751
------------------------------------------------
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 4,634,015 4,628,876 4,580,841
Effect of dilutive securities:
Stock options 52,872 60,148
------------------------------------------------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed
conversions 4,634,015 4,681,748 4,640,989
------------------------------------------------
------------------------------------------------
Basic earnings (loss) per share: $(1.07) $0.03 $0.38
Diluted earnings (loss) per share: $(1.07) $0.03 $0.38
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
The calculation of diluted earnings per share for the year ended March 31, 1999
did not include 14,508 weighted average shares from outstanding stock options as
their inclusion would have been antidilutive.
NOTE 14. BUSINESS SEGMENTS AND RELATED INFORMATION
Significant operations outside the U.S. include wholly-owned sales, technical
support and distribution subsidiaries in the Netherlands, United Kingdom and
Australia, and the Company's majority-owned Pronexus subsidiary in Canada.
Geographic information for the years ended March 31, 1999, 1998 and 1997 is
presented in the table that follows (in thousands):
41
<PAGE>
<TABLE>
<CAPTION>
Year ended March 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
United States $50,894 $43,415 $41,551
Foreign 11,323 9,736 7,964
- --------------------------------------------------------------------------------------------------
$62,217 $53,151 $49,515
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Net sales, as shown in the table, are based upon the geographic area into which
the products were sold and delivered to unaffiliated entities. Substantially all
identifiable long-lived assets are located in the United States.
The Company's largest customer accounted for approximately 20% and 11% of total
revenues for the years ended March 31, 1999 and 1998, respectively. No other
single customer accounted for more than 10% of the Company's revenues in the
years ended March 31, 1999, 1998 and 1997.
NOTE 15. SUBSEQUENT EVENTS
On May 5, 1999, the Company entered into an Investment Agreement with its
largest customer which provided up to a $6.5 million borrowing commitment to the
Company in exchange for a stock purchase warrant for 500,000 shares of the
Company's common stock at a price of $13.00 per share. Borrowings under the note
portion of the agreement bear interest at a rate of 7.8% and are due to be
repaid on May 5, 2002.
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the Company's unaudited quarterly financial
information for the fiscal years ending March 31, 1999 and 1998 (in thousands,
except per share data):
<TABLE>
<CAPTION>
Fiscal Year 1999
-----------------------------------------------------------------------
June 30 September 30 December 31 March 31
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $13,404 $14,301 $16,629 $17,883
Gross profit 7,474 7,682 8,502 9,724
Net loss (1,020) (1,295) (1,490) (1,164)
Loss per share:
Basic $(0.22) $(0.28) $(0.32) $(0.25)
Diluted $(0.22) $(0.28) $(0.32) $(0.25)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998
-----------------------------------------------------------------------
June 30 September 30 December 31 March 31
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $11,779 $14,523 $14,063 $12,786
Gross profit 6,958 8,007 8,661 6,569
Net income (loss) 455 411 618 (1,342)
Earnings (loss) per share:
Basic $0.10 $0.09 $0.13 $(0.29)
Diluted $0.10 $0.09 $0.13 $(0.29)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
42
<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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, 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.
/s/ ERNST & YOUNG LLP
Seattle, Washington
May 13, 1999
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 "Section 16(a)
Beneficial Ownership Reporting" in the Proxy Statement for the Company's Annual
Meeting of Shareholders scheduled to be held on August 19, 1999, 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 Shareholders scheduled
to be held on August 19, 1999.
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 section captioned "Voting Securities and Principal
Holders" of the Proxy Statement for the Company's Annual Meeting of Shareholders
scheduled to be held on August 19, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Consolidated Financial Statements
Consolidated Statements of Operations - Years ended March 31, 1999, 1998 and
1997 Consolidated Balance Sheets - March 31, 1999 and 1998 Consolidated
Statements of Cash Flows - Years ended March 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended March 31, 1999,
1998 and 1997 Notes to Consolidated Financial Statements Report of Ernst & Young
LLP, 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.
44
<PAGE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three-month period ended
March 31, 1999.
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
<TABLE>
<S> <C>
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
to the Registrant's Quarterly Report on Form 10-Q for its fiscal
quarter ended September 30, 1997 (File No. 0-22804))
</TABLE>
EXHIBIT NO. 10: MATERIAL CONTRACTS
EXECUTIVE COMPENSATION PLANS AND AGREEMENTS
<TABLE>
<S> <C>
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 (incorporated by reference from
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1996 (File No. 0-22804))
10.7 First Amendment to the 1996 Employee Stock Purchase Plan (incorporated
by reference from Exhibit 10.7 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31, 1997 (File No. 0-22804))
10.8 Second Amendment to the 1996 Employee Stock Purchase Plan (incorporated
by reference from Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.9 Third Amendment to the 1996 Employee Stock Purchase Plan (filed
herewith)
</TABLE>
45
<PAGE>
<TABLE>
<S> <C>
10.10 1996 Stock Option Plan (incorporated by reference from Exhibit 99.1 to
the Registrant's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on February 13, 1997 (File No.
333-21739))
10.11 First Amendment to the 1996 Stock Option Plan (incorporated by
reference from Exhibit 10.10 to the Registrant's Annual Report on Form
10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.12 1997 Director Stock Option Plan (incorporated by reference from Exhibit
10.11 to the Registrant's Annual Report on Form 10-K for its fiscal
year ended March 31, 1998 (File No. 0-22804))
10.13 Form of Continuing Director Option under the 1997 Director Stock Option
Plan (incorporated by reference from Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1997 (File No. 0-22804))
10.14 Form of Initial Option under the 1997 Director Stock Option Plan
(incorporated by reference from Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1997 (File No. 0-22804))
10.15 Form of Annual Option under the 1997 Director Stock Option Plan
(incorporated by reference from Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1997 (File No. 0-22804))
10.16 First Amendment to the 1997 Director Stock Option Plan (filed herewith)
10.17 1998 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, 1997 (File No. 0-22804))
10.18 First Amendment to the 1998 Stock Option Plan (incorporated by
reference from Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.19 Employment Agreement and Nondisclosure Agreement dated April 17, 1989
between Registrant and Douglass S. Anderson (incorporated by reference
from Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for
its fiscal year ended March 31, 1996 (File No. 0-22804))
10.20 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))
10.21 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))
10.22 Employee Agreement and Nondisclosure Agreement dated December 10, 1996
between Registrant and Frank C. Costa (incorporated by reference from
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1997 (File No. 0-22804))
10.23 Employee Agreement and Nondisclosure Agreement dated March 22, 1991
between Registrant and Edward F. Masters (incorporated by reference
from Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for
its fiscal year ended March 31, 1997 (File No. 0-22804))
</TABLE>
46
<PAGE>
<TABLE>
<S> <C>
10.24 Employee Agreement and Nondisclosure Agreement dated January 24, 1991
between Registrant and Kevin L. Chestnut (incorporated by reference
from Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for
its fiscal year ended March 31, 1998 (File No. 0-22804))
10.25 Employee Agreement and Proprietary Rights Agreement dated May 18, 1999
between Registrant and Ken Myer (filed herewith)
10.26 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))
</TABLE>
OTHER MATERIAL CONTRACTS
<TABLE>
<S> <C>
10.24 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))
10.25 Amendment to Office Lease dated April 27, 1994, between Registrant and
Martin Selig (incorporated by reference from Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for its fiscal quarter ended
June 30, 1994 (File No. 0-22804))
10.26 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))
10.27 Amendment to Office Lease dated December 19, 1996 between Registrant
and Martin Selig (incorporated by reference from Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1997 (File No. 0-22804))
10.28 Amendment to Office Lease dated December 12, 1997 between Registrant
and Martin Selig (incorporated by reference from Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1998 (File No. 0-22804))
10.29 Amendment to Office Lease dated March 27, 1998 between Registrant and
Martin Selig (incorporated by reference from Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1998 (File No. 0-22804))
10.30 Subordination, Non-Disturbance and Attornment Agreement dated April 9,
1997, between Registrant and Caystar Corp. II (incorporated by
reference from Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.31 Line of Credit Agreement between Registrant and Wells Fargo Bank, N.A.
dated November 13, 1997 (incorporated by reference from Exhibit 10.31
to the Registrant's Annual Report on Form 10-K for its fiscal year
ended March 31, 1998 (File No. 0-22804))
10.32 Amendment to Line of Credit Agreement between Registrant and Wells
Fargo Bank, N.A. dated August 1, 1998 (incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for its
fiscal quarter ended June 30, 1998 (File No. 0-22804))
10.33 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))
10.34 Investment Agreement between Registrant and NEC Corporation dated May
5, 1999 (filed herewith)
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
10.35 Master Purchase Agreement between Registrant and NEC Corporation dated
May 5, 1999 (filed herewith)
10.36 Patent License Agreement dated March 2, 1990, between Registrant and
Dytel Corporation (Confidential treatment has been granted for portions
of this document) (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))
10.37 Automated Attendant Patent License Agreement between Registrant and
VMX, Inc. (Confidential treatment has been granted for portions of this
document) (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))
10.38 Voice Mail Patent License Agreement between Registrant and VMX, Inc.
(Confidential treatment has been granted for portions of this document)
(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))
10.39 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))
10.40 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))
</TABLE>
EXHIBIT NO. 11: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The required information is included in Note 13 of "Notes to
Consolidated Financial Statements."
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
21.1 Subsidiaries of Registrant (incorporated by reference from Exhibit 21.1
to the Registrant's Annual Report on Form 10-K for its fiscal year
ended March 31, 1998 (File No. 0-22804))
</TABLE>
EXHIBIT NO. 23: CONSENT OF EXPERTS AND COUNSEL
<TABLE>
<S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
<TABLE>
<S> <C>
27.1 Financial Data Schedule
</TABLE>
48
<PAGE>
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
ACTIVE VOICE CORPORATION
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------------------------
Additions
---------------------
Description Balance at Charged to Charged Deductions Balance at
Beginning of Costs and to Other End of
Period Expenses Accounts Period
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
Deducted from asset accounts:
Allowance for doubtful $1,215 $237 -0- (a)$252 $1,200
accounts
Allowance for sales 300 200 -0- -0- 500
returns
- --------------------------------------------------------------------------------------------------------
Totals $1,515 $437 -0- $252 $1,700
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Year ended March 31, 1998
Deducted from asset accounts:
Allowance for doubtful $1,326 $275 -0- (a)$386 $1,215
accounts
Allowance for sales 344 -0- -0- (b) 44 300
returns
- --------------------------------------------------------------------------------------------------------
Totals $1,670 $275 -0- $430 $1,515
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful $1,086 $698 -0- (a)$458 $1,326
accounts
Allowance for sales 279 65 -0- -0- 344
returns
- --------------------------------------------------------------------------------------------------------
Totals $1,365 $763 -0- $458 $1,670
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a)Uncollectable accounts written off, net of recoveries
(b)Reduction of estimated future sales returns
49
<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 28, 1999.
ACTIVE VOICE CORPORATION
By /s/ Jose S. David
-------------------------
Jose S. David
CHIEF FINANCIAL OFFICER
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Frank J. Costa Chief Executive Officer and June 28, 1999
- ---------------------------- Principal Executive Officer
Frank J. Costa
/s/ Jose S. David Chief Financial Officer June 28, 1999
- ---------------------------- Secretary and Treasurer
Jose S. David (Principal Financial and
Accounting Officer)
/s/ Robert L. Richmond Chairman of the Board June 28, 1999
- ----------------------------
Robert L. Richmond
/s/ Tom A. Alberg Director June 28, 1999
- ----------------------------
Tom A. Alberg
/s/ Douglas P. Beighle Director June 28, 1999
- ----------------------------
Douglas P. Beighle
/s/ Robert C. Greco Director June 28, 1999
- ----------------------------
Robert C. Greco
/s/ Harold H. Kawaguchi Director June 28, 1999
- ----------------------------
Harold H. Kawaguchi
</TABLE>
50
<PAGE>
THIRD AMENDMENT
TO
ACTIVE VOICE CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN
THIS THIRD AMENDMENT is adopted effective as of July 1, 1999 (the
"Amendment Date"), by ACTIVE VOICE CORPORATION, a Washington corporation (the
"Company").
RECITALS
A. The Company has adopted the Active Voice Corporation 1996 Employee
Stock Purchase Plan (the "Plan").
B. The Company has adopted that certain First Amendment to the Plan
effective as of July 1, 1997, and that certain Second Amendment to the Plan
effective as of June 1, 1998.
C. The Company desires to further amend the Plan in certain respects.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Article 3 of the Plan is amended and restated in its entirety as
follows:
ARTICLE 3
ELIGIBLE EMPLOYEES
As used in the Plan, the term "Eligible Employees" means all common
law employees of the Company and its current wholly-owned subsidiaries (and
each other corporation that is or becomes at least a majority-owned
subsidiary of the Company and is designated by the Committee as an employer
whose employees are eligible for purposes of the Plan), except the
following: (a) employees whose customary employment is 10 hours or less
per week; and (b) 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
<PAGE>
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 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.
2. Article 4 of the Plan is amended by replacing "150,000" with
"350,000."
3. The amendment to the Plan made by Section 2 of this Third Amendment
shall be subject to approval by the shareholders of the Company in a manner
complying with the Internal Revenue Code of 1986, as amended. If such approval
is not obtained by September 30, 1999, Section 2 of this Third Amendment shall
be void and of no effect.
4 Except as amended hereby, the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, this Third Amendment has been executed as of the
Amendment Date.
ACTIVE VOICE CORPORATION
By /s/ Frank J. Costa
----------------------------------------
Frank J. Costa
Chief Executive Officer
-2-
<PAGE>
FIRST AMENDMENT
TO
ACTIVE VOICE CORPORATION
1997 DIRECTOR STOCK OPTION PLAN
THIS FIRST AMENDMENT is adopted effective as of May 6, 1999 (the
"Amendment Date"), by ACTIVE VOICE CORPORATION, a Washington corporation (the
"Company").
RECITALS
A. The Company has adopted the Active Voice Corporation 1997 Director
Stock Option Plan, which was amended and restated as of June 22, 1998 (the
"Plan").
B. The Company desires to amend the Plan in certain respects.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Section 4 of the Plan is amended by replacing "sixty thousand
(60,000)" with "eighty-four thousand (84,000)."
2. Except as amended hereby, the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, this First Amendment has been executed as of the
Amendment Date.
ACTIVE VOICE CORPORATION
By /s/ Robert L. Richmond
-------------------------------------
Robert L. Richmond
President and Chief Executive Officer
<PAGE>
ACTIVE VOICE CORPORATION
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into this 18th day of
May, 1999 by and between Active Voice Corporation, a Washington corporation (the
"Employer") and Ken Myer(the "Employee").
The Employer desires to employ or continue employing the Employee under
the terms and conditions in this Agreement and the Employee desires to become
employed or continue employment with the Employer under the terms and conditions
of this Agreement.
Therefore, in consideration of the mutual promises contained in this
Agreement, the parties agree as follows:
1. EMPLOYMENT AND TITLE.
The Employee shall be assigned initially to Executive Vice President of
Sales and Marketing position. The Employee's position, job duties and
responsibilities may change from time to time as the Employer's business
changes.
2. TERM OF AGREEMENT.
This Agreement shall be for an indefinite period of time and may be
terminated at any time pursuant to Paragraph 7. During the term of this
Agreement, Employee shall devote his/her full-time and attention and his/her
best efforts to the 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 an initial base salary of $12,500.00 PER PAY
PERIOD (less deductions). The Employer may change the compensation paid to the
Employee, including commissions, incentives, and/or other benefits, according to
its usual personnel practices. Changes in compensation shall be approved in
writing by the Employer's President (or designee) and need not be signed by the
Employee to be effective under Paragraph 13 of this Agreement.
4. DUTIES.
The Employee will perform all the duties and responsibilities of the
Employee's assigned position or other duties and responsibilities as requested
by the Employer.
1
<PAGE>
5. EXPENSES.
Subject to the Employer's policies, procedures and standards, the
Employee is authorized to incur reasonable expenses for promoting the business
of the Employer, including expenses for entertainment, travel, and/or similar
items. The Employer will reimburse the Employee for reasonable business expenses
in accordance with the Employer's expense reimbursement policies, procedures and
standards. Any unreimbursed expenses remain the responsibility of the Employee.
6. MEDICAL AND DENTAL INSURANCE.
The Employer currently sponsors various group insurance plans. The
Employee shall be eligible to participate in such plans according to the terms
of such plans. To the extent that the Employee is not covered under such plans,
the Employer shall pay an equivalent amount to a plan mutually selected by the
Employer and the Employee.
7. TERMINATION OF AGREEMENT.
This Agreement shall be terminated upon the occurrence of any one or
more of the following events:
(a) The death of the Employee;
(b) The parties' mutual agreement to terminate this Agreement at
a date mutually agreeable to both parties;
(c) The Employee giving a 30 day written notice of resignation
to the Employer;
(d) The Employer giving a thirty (30) day notice of termination,
with or without cause, to the Employee.
In the event of a termination under Subparagraphs 7(c) or 7(d), the Employee
shall receive his/her regular compensation up to the effective date of
termination and shall continue to render services to the Employer, unless the
Employer, at its option, chooses to waive this obligation, and require no
further services during all or part of the notice period; provided, however,
that in such an event the Employer will still continue to pay the Employee's
compensation through the effective date of termination.
8. NONSOLICITATION.
The Employee agrees that he/she will not, at any time while employed by the
Employer and for twelve (12) months following termination of the Employee's
employment with the Employer, directly or indirectly solicit or entice any of
the following to cease, terminate or reduce any relationship with the Employer
or to divert any business from the Employer:
(a) any executive, employee or representative of the Employer;
(b) any supplier of the Employer;
2
<PAGE>
(c) any customer, client or account of the Employer; or
(d) any prospective customer, client or account from whom the
Employee solicited business while employed by the Employer.
Further, the Employee will not disclose the names, addresses, telephone numbers,
compensation or arrangements between the Employer and any person or entity
described in (a), (b), or (c) above to any competitor of the Employer. The
Employee acknowledges that any breach or threatened breach of this paragraph
will cause irreparable harm to the Employer, which injury may be inadequately
compensable in money damages, and that the Employer shall be entitled to
equitable relief in any court of competent jurisdiction to prevent or restrain
any such breach or threatened breach by the Employee or any persons acting for
or with him/her. Equitable relief shall include, but not be limited to,
temporary restraining orders, or preliminary or permanent injunctions, without
the necessity for posting bond or other security, the protection of which is
hereby expressly waived. The Employee also expressly acknowledges and agrees
that these equitable remedies are in addition to, and not any limitation upon,
all rights and remedies that the Employer may be entitled to under this
Agreement and any applicable law.
9. VENUE AND JURISDICTION.
This Agreement is to be interpreted according to the laws of the State
of Washington without regard to the jurisdiction in which any action or
proceeding may be initiated.
10. 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.
11. SEVERABILITY.
If any portion of this Agreement is held to be invalid, unenforceable or
void, such holding shall not have the effect of invalidating or voiding the
remainder of this Agreement. Any portion of this Agreement which is held to be
invalid, unenforceable or void shall, if possible, be deemed amended or reduced
in scope, or stricken from this Agreement, only to the extent required for the
purposes of validity and enforcement of the Agreement.
12. NOTICES.
Any demand, request, or notice that either party 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 (3) days after being deposited in
the United States mail, postage prepaid, in registered or certified form,
addressed (a) in the case of the Employee, to his/her last known address, and
(b) in the case of the Employer, to its principal place of business.
3
<PAGE>
13. ASSIGNMENTS.
The Employee's obligations under this Agreement are personal and may not
be assigned, delegated, sold or otherwise transferred by him/her except as the
Employer may consent in writing. The Employer may assign its rights and
obligations under this Agreement to its successors and assigns.
14. COMPLETE AGREEMENT.
This Agreement contains the entire agreement between the parties
relating to its subject matter and supersedes all prior agreements. The parties
specifically acknowledge and agree that the Employer's personnel policies,
handbooks and procedures are not part of this Agreement, and do not constitute
employment contracts or agreements. Except as provided in Paragraph 3, no waiver
or modification of this Agreement shall be valid unless it is in writing and it
is signed by both the Employee and the Employer's President (or designee).
EMPLOYER EMPLOYEE
ACTIVE VOICE CORPORATION
BY: /s/ Frank J. Costa /s/ Ken Myer
ITS: President
5/18/99 5/18/99
Date Date
4
<PAGE>
ACTIVE VOICE CORP.
PROPRIETARY RIGHTS AGREEMENT
In consideration of my employment by Active Voice, Corp. ("Active
Voice") or my continued employment at will by Active Voice, whether as a regular
employee or an independent contractor, and the payment to me of salary or other
compensation, including deferred compensation, that I shall receive during my
employment, I agree as follows:
1. CONFIDENTIALITY.
1.1 I will not, without Active Voice's prior written permission,
disclose to anyone outside of Active Voice or use in other than Active Voice's
business, either during or after my employment, any confidential information or
material of Active Voice or any information or materials received in confidence
from third parties by Active Voice. I will presume that the following types of
information are all confidential except information that has clearly been made
available generally to the public: source code, product designs and methods of
operation, product and business plans, and identities of Active Voice's
customers and suppliers.
1.2 If I leave the employ of Active Voice, I will return all
property of Active Voice in my possession, including all confidential
information or material such as drawings, notebooks, reports and other
documents.
1.3 Confidential information or material of Active Voice is any
information or material: (a) generated or collected by or used in the operations
of Active Voice that relates to the actual or anticipated business or research
and development of Active Voice, or (b) suggested by or resulting from any task
assigned to me or work performed by me for or on behalf of Active Voice, and
which has not been made available generally to the public.
1.4 Because a breach of this provision may cause irreparable harm
to Active Voice with no adequate remedy, this provision may be enforced by court
order.
2. NON-COMPETITION.
2.1 To ensure that no confidential information of Active Voice is
improperly used or disclosed, I will not, during the term of my employment and
for a period of six months following termination, assist any other company,
whether as owner, shareholder, director, employee, contractor, or volunteer,
which is developing or marketing any computer software or software controlled
hardware designed for use in conjunction with telephone systems for the
following purposes: voice recording or playback, call accounting, general
purpose microcomputer connected to and communicating with a PBX.
5
<PAGE>
2.2 Examples of companies which are currently proscribed include:
Applied Voice Technology, Panoply, Octel, Mitel, Dytel, VMX, Advanced Voice
Technology, Boston Technology, AT&T, Rolm, Unisys, Wang, NEC, Dictaphone,
Siemens, Northern Telecom, and Brooktrout.
3. CONFIDENTIALITY DUTIES TO OTHERS.
3.1 I will not disclose to Active Voice, use in its business, or
cause it to use, any information or material which is confidential to others.
3.2 I do not have in my possession or control any documents or
other materials containing confidential information of my former employers which
might be considered to be of interest to Active Voice.
3.3 On the last page of this Agreement I have listed and
identified all non-competition or non-disclosure agreements which may remain
currently binding between myself and any former employers. If I do not have any
to identify, I have written "none" on this line: ______________________________.
4. RIGHTS TO DEVELOPMENTS.
4.1 I hereby assign to Active Voice my entire right, title, and
interest in any idea, invention, design of a useful article (whether the design
is ornamental or otherwise), computer program and related documentation, and any
other Work of authorship (all hereafter called "Developments"), made or
conceived during my employment with Active Voice solely or jointly by me, or
created wholly or in part by me, whether or not such Developments are
patentable, protected by copyrights, or susceptible to other forms of
protection, where the Developments: (a) relate to the actual or anticipated
business or research or development of Active Voice, or (b) result from any task
assigned to me or work performed by me for or on behalf of Active Voice.
4.2 This assignment provision does not apply to an invention for
which no equipment, supplies, facility, or trade secret information of Active
Voice was used and which was developed entirely on my own time, unless it meets
condition (a) or (b) above.
4.3 Excluded are any Developments that I cannot assign to Active
Voice because of a prior agreement made prior to employment by Active Voice with
________________________________________________________________________________
_______________________________which is effective until
____________________________________________.
(give name and date or write "none)
4.4 I acknowledge that the copyrights and any other intellectual
property rights in designs, computer programs and related documentation, and
works of authorship, created within the scope of my employment, belong to Active
Voice by operation of law. I expressly acknowledge that Active Voice is to be
the "author," within the meaning of the United States Copyright Act (the "Act"),
of any of my work product that may be considered a "work for hire" within the
meaning of the Act.
6
<PAGE>
5. PREEXISTING DEVELOPMENTS.
5.1 On the last page of this Agreement I have identified all
Developments not assigned by section 4 in which I have any right, title, or
interest, and which were previously made or conceived solely or jointly by me,
or written wholly or in part by me, but neither published nor filed in any
patent office, whether or not previously identified to Active Voice.
5.2 If I do not have any to identify, I have written "none" on
this line: ________________________. (Note: It is in your interest to establish
that any of the above were made, conceived, or written before your employment by
Active Voice. You should not disclose them in detail, but identify them only by
the titles and dates of documents describing them.)
5.3 In the event (and to the extent) that any work product
produced by me and delivered to Active Voice for use by Active Voice or its
customers contains any items or elements which may be proprietary to me or any
of my suppliers, I hereby grant to Active Voice an irrevocable, perpetual,
non-exclusive, royalty-free, worldwide license to reproduce, distribute copies
of, prepare derivative works based on, display, and perform the work product,
and to authorize others to do any of the foregoing.
6. SECURING AND ENFORCING PROPRIETARY RIGHTS.
In connection with any of the Developments or work product
assigned or licensed by paragraphs 5 or 7: (a) I will promptly disclose them to
Active Voice's management; and (b) I will, on Active Voice's request, promptly
execute a specific assignment of title to Active Voice or its designee, and do
anything else reasonably necessary to enable Active Voice or its designee to
secure and enforce patents, copyrights, or other forms of protection therefor in
the United States and in other countries. I irrevocably designate Active Voice
as my agent and attorney-in-fact to execute and file any applications or other
documents and to take any other actions to further the securing and enforcement
of such protection.
7. DISTRIBUTION OR ATTRIBUTION.
Active Voice and its licensees (direct and indirect) are not
required to make any distribution of or designate me as author of any design,
computer program or related documentation, or other work of authorship assigned
or licensed in sections 4 or 5.
8. RELIEF AND EXPENSES.
I acknowledge that any violation of this Agreement by me will
cause irreparable injury to Active Voice, and Active Voice shall be entitled to
extraordinary relief in court, including, but not limited to, temporary
restraining orders, preliminary injunctions, and permanent injunctions, without
the necessity of posting bond or security. If court proceedings are required to
enforce any provision or to remedy any
7
<PAGE>
breach of this Agreement, the prevailing party shall be entitled to an award
of reasonable and necessary expenses of litigation, including reasonable
attorneys' fees.
9. ENFORCEABILITY.
I agree that this Agreement shall be governed for all purposes by
the laws of the State of Washington as such law applies to contracts to be
performed within Washington by residents of Washington and that venue for any
action arising out of this Agreement shall be properly laid in King County,
Washington, or in Federal District Court for the Western District of Washington.
If any provision of this Agreement is void or is so declared, such provision
shall be severed from this Agreement, which shall otherwise remain in full force
and effect.
10. NONSOLICITATION.
While employed at active Voice and for a period of one (1) year
from the termination of my employment I will not induce or attempt to influence
directly or indirectly any employee of Active Voice to terminate his/her
employment with Active Voice or to work for me or any other person or entity.
11. ENTIRE AGREEMENT.
With respect to the subject matter hereof, this is my entire
agreement with Active Voice, and it supersedes (to the extent enforceable) all
previous oral or written communications, representations, understandings,
undertakings, or agreements by or with Active Voice. The term Active Voice as
used in this Agreement, includes any entity owned or controlled, directly or
indirectly, by Active Voice.
12. ACKNOWLEDGMENT OF RECEIPT.
I acknowledge receipt of a copy of this Agreement. Understood and
agreed to by:
Ken Myer
Employee's Full Name (please print)
/s/ Ken Myer 5/18/99
Employee's Signature Date
Frank J. Costa
Corporate officer (please print)
/s/ Frank J. Costa 5/18/99
Signature Date
(If you have entered "none" in section 3, do not fill in this section.)
The following are all the non-competition or non-disclosure agreements which
may remain currently binding between myself and my former employers.
8
<PAGE>
Former Employer Dates of Employment
IBM Corporation_________________ 10/83 to 6/2/99
______________________________ __________to___________
______________________________ __________to___________
Signed:/s/ Ken Myer
Employee's Full Name
5/18/99
Date
(If you have entered "none" in section 5, do not fill in this section.)
The following are Developments not covered by section 4, in which I have any
right, title or interest, and which were previously conceived or written either
wholly or in part by me, but neither published nor filed in any patent office,
whether or not previously identified to Active Voice.
Description of Documents (if applicable):
Title on Document Date on Document Name of Witness on
Document
Coursework & Lecture ________________ ____________________
Materials for Executive
MBA Programs ________________ ____________________
_______________________ ________________ ____________________
Signed: /s/ Ken Myer
Employee's Full Name
--------------------
Date
9
<PAGE>
INVESTMENT AGREEMENT
This Investment Agreement is entered into this 5th day of May, 1999,
between Active Voice Corporation, a Washington corporation (the "Company"),
and NEC Corporation, a corporation organized under the laws of Japan ("NEC").
In consideration of their respective undertakings as set forth below, the
parties hereby agree, represent and warrant as follows:
1. PURCHASE OF NOTES. NEC hereby agrees to purchase up to an
aggregate of $6,500,000 principal amount of the Company's Promissory Notes in
the form attached hereto as Exhibit A (the "Notes"). NEC shall purchase a
principal amount of $4,000,000 of Notes for cash at the initial closing of
this Agreement. Thereafter, the Company shall have the right, exercisable in
its sole discretion, to require NEC to purchase additional Notes, in
principal amounts of $1,500,000 and $1,000,000, respectively, upon giving NEC
fifteen days' advance written notice of the date on which such additional
funds are desired, which date may not be later than twelve (12) months after
the date of the initial closing of this Agreement. If the Company has not
given timely notice requiring NEC to purchase both of such additional Notes
by the end of such twelve-month period, then NEC's obligation to purchase any
additional Note or Notes as to which such notice has not been timely given
shall expire. NEC's obligation to purchase Notes hereunder shall be subject
to satisfaction of the applicable closing conditions described in Section
8(b) below.
2. ISSUANCE OF WARRANT. As a part of the consideration for NEC's
advance of funds to the Company upon purchase of the Notes, the Company shall
issue to NEC, at the initial closing of this Agreement, a Common Stock
Purchase Warrant entitling NEC to purchase up to 500,000 shares of the
Company's Common Stock at a price of $13.00 per share, in the form attached
hereto as Exhibit B (the "Warrant").
3. REPRESENTATIONS BY THE COMPANY. The Company represents and
warrants to NEC, as of each closing date under this Agreement, that:
(a) The Company is a corporation duly organized and in good
standing under the laws of the State of Washington, and has corporate power
and authority to enter into and perform its obligations under this Agreement,
the Notes and the Warrant.
(b) All necessary corporate proceedings required by applicable
corporations laws and the Company's Articles of Incorporation and Bylaws to
authorize this Agreement, and the issuance and performance of its obligations
under the Notes and the Warrant, including the issuance of Common Stock upon
exercise of the Warrant, have been conducted.
(c) This Agreement, the Notes and the Warrant constitute legal,
valid and binding obligations of the Company, enforceable in accordance with
their terms, subject only to applicable bankruptcy, reorganization,
insolvency or similar laws, matters of public policy, and judicial principles
governing the availability of equitable relief.
<PAGE>
(d) The shares of Common Stock issuable upon exercise of the
Warrant, when issued in accordance with its terms and duly executed by the
appropriate officers of the Company as required by law, will be duly and
validly issued, fully paid and nonassessable shares of the Company's Common
Stock.
4. REPRESENTATIONS BY NEC. NEC represents and warrants to the
Company, as of each closing date under this Agreement, that:
(a) NEC is a corporation duly organized and in good standing under
the laws of New York, and has corporate power and authority to enter into
this Agreement.
(b) All necessary corporate proceedings required by applicable
corporations laws and by NEC's [Articles] of Incorporation and Bylaws to
authorize this Agreement and the making of the investments contemplated
herein have been conducted.
(c) This Agreement constitutes the legal, valid and binding
obligation of NEC, enforceable in accordance with its terms, subject only to
applicable bankruptcy, reorganization, insolvency or similar laws, matters of
public policy, and judicial principles governing the availability of
equitable relief.
(d) NEC is an "accredited investor" as defined in Rule 501(a) of
the U.S. Securities and Exchange Commission ("SEC"); has sufficient
experience and sophistication in investments of this type to be able to judge
the merits and risks of the investment for itself; has been responsible for
its own analysis of the Company and the merits and risks of this investment;
recognizes that an investment of this type involves certain risks; and is
able to bear the economic risks of this investment.
(e) NEC understands that neither the offering nor the sale of the
Notes, the Warrant, or the shares of Common Stock issuable upon exercise of
the Warrant, has been registered under the Securities Act of 1933, as amended
(the "Act") or under any state blue sky laws, in reliance upon certain
exemptions therefrom; that the Notes, the Warrant, and the shares of Common
Stock issuable upon exercise of the Warrant must be held indefinitely unless
the sale or transfer thereof is subsequently registered under the Act and
applicable state blue sky laws, or an exemption from such registration is
available; and that the Company is under no obligation to effect such a
registration except as expressly required to do so under Section 5(d) below.
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<PAGE>
5. TRANSFER RESTRICTIONS; REGISTRATION RIGHTS.
(a) RESTRICTIVE LEGENDS. Each Note and Warrant issued hereunder,
as well as each certificate representing shares of Common Stock issued upon
exercise of the Warrant, shall be stamped conspicuously on its face "SEE
TRANSFER AND OTHER RESTRICTIONS ON REVERSE," and on its face or reverse side
shall be stamped or imprinted with the following legend:
NOTICE: RESTRICTION ON TRANSFER AND OTHER MATTERS
The securities represented hereby have not been registered
under the Securities Act of 1933 or any state securities
law, and may not be offered, sold, transferred, encumbered
or otherwise disposed of except upon satisfaction of certain
conditions, which are set forth in that certain "Investment
Agreement" dated May __, 1999, which also contains various
other provisions affecting these securities, binding upon
transferees hereof. Information concerning these
restrictions and provisions may be obtained from the
corporation or its legal counsel. Any offer or disposition
of these securities without satisfaction of said conditions
will be wrongful, and will not entitle the transferee to
register ownership of the securities with the corporation.
NEC further consents to the notation of "STOP TRANSFER" restrictions in the
Company's stock transfer books relative to its holdings of Notes and Common
Stock, to assist in the enforcement of the covenants and limitations set
forth herein.
(b) RESTRICTION ON TRANSFER. The Notes and Warrant issued
hereunder, and such shares of Common Stock as may be issuable upon exercise
of the Warrant, shall not be transferable except upon the conditions
hereinafter specified, which conditions are intended to ensure compliance
with the exemptions sought to be obtained by the Company under the Act and
applicable state blue sky laws. Each holder of each such Note, Warrant and
share of Common Stock shall, prior to any transfer (which term, as used
herein, includes, without being limited to, any sale, offer, pledge or
encumbrance) or attempted transfer of such securities, give written notice to
the Company of such holder's intention to effect such transfer. Each such
notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail, and shall contain an undertaking by the holder giving
such notice to furnish such other information as may be required, for the
Company and its legal counsel to reasonably conclude that the proposed
transfer may be effected without registration of such Note, Warrant or Common
Stock under the Act or any applicable state blue sky laws. If, after
examining the information so furnished, the Company's legal counsel advises
the Company that it is unable to so conclude, then the Company shall be
entitled to request that the holder furnish an opinion of legal counsel, in
form and substance satisfactory to the Company, to such effect. Upon receipt
of such a legal opinion, the Company shall,
3
<PAGE>
as promptly as practicable, transfer such Note, Warrant or Common Stock in
accordance with the terms of the notice delivered by such holder to the
Company, with any replacement Note, Warrant or stock certificate issued upon
such transfer to bear the restrictive legend set forth in Section 5(a) above
unless in the opinion of the Company's or the holder's counsel such legend is
not required. The holder of any such Note, Warrant or Common Stock giving
notice under this Section 5(b) shall not be entitled to transfer such Note,
Warrant or stock until receipt of such a legal opinion by the Company from
its counsel or the holder's counsel, or until receipt of a "no-action" letter
or similar interpretive opinion from the staff of each appropriate securities
agency, satisfactory in form to the Company, or until registration of such
securities under the Act and any applicable state blue sky law has become
effective.
(c) RIGHT OF FIRST REFUSAL. In addition to the foregoing transfer
restrictions, NEC agrees that if, after acquiring Common Stock of the Company
through exercise of the Warrant or otherwise, NEC or any other member of the
Affiliated Group proposes to transfer to any third party or Group (other than
to any other member of the Affiliated Group), in a single transaction or
series of related transactions, shares of Common Stock (or any option, right
or warrant to acquire, or security convertible or exchangeable into, Common
Stock) representing 5.0% or more of the outstanding shares of Common Stock,
as calculated on an Exercised Basis, then NEC shall give the Company advance
written notice of the identity of the proposed transferee(s) and the price
and other material terms of the transaction resulting in the proposed
transfer. The Company shall then have a period of ten (10) business days
after the receipt of such notice in which to elect, by written notice to NEC,
to acquire the securities proposed to be transferred, on the same terms as
those set forth in such notice (or, if such notice describes consideration
payable other than in cash, on all of the same terms as set forth in the
notice except for consideration, which the Company may elect instead to pay
in cash in an amount equal to the fair market value of the non-cash
consideration described in the notice as of the date of the Company's
election to exercise this right). If the Company timely elects to exercise
its rights under this Section 5(c), its acquisition of the securities
described in the notice from NEC shall be closed within five (5) business
days after the date of notice to NEC of the Company's election to exercise.
The Company shall have the right to assign its rights under this Section 5(c)
to any third party or parties of its choice, on one or more occasions. The
provisions of this Section 5(c) shall not apply to: (i) transfers by NEC to
other members of the Affiliated Group (subject to the requirements of Section
10(c) below); or (ii) registered sales under Section 5(d), or sales by NEC
pursuant to SEC Rule 144, unless in either such case NEC or the selling party
or their brokers or sales agent(s) have reason to believe that 5.0% or more
of the outstanding shares of Common Stock, as calculated on an Exercised
Basis, is being transferred in a single transaction or series of related
transactions to a single third party or Group.
(d) REGISTRATION RIGHTS.
(i) For purposes of this Section 5(d): the term
"Registrable Securities" means the Common Stock issuable or issued upon
exercise of the Warrant, and any Common Stock issued as (or issuable upon the
conversion or exercise of any
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<PAGE>
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
Common Stock issued or issuable upon exercise of the Warrant (excluding in
all cases, however, any Registrable Securities sold by a person in a
transaction in which such person's rights cannot be assigned under Section
5(d)(vii); and the term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 5(d)(vii) hereof.
(ii) If (but without any obligation to do so) the Company
proposes to register under the Act (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
capital stock or other securities under the Securities Act in connection with
the public offering of such stock or securities solely for cash (other than a
registration on SEC Form S-8 or any other form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities), the
Company shall, each such time, promptly give each Holder written notice of
such registration together with a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under the applicable
blue sky laws. Upon the written request of each Holder given within twenty
(20) days after giving of such written notice by the Company, the Company
shall, subject to the limitations set forth in Section 5(d)(iii) below, cause
to be registered under the Act all of the Registrable Securities that each
such Holder has requested to be registered.
(iii) The right of any Holder to registration pursuant to this
Section 5(d) shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for underwriting by the Company. Notwithstanding any other
provision of this Section 5(d), if the underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, then
the underwriter may (subject to the allocation priority set forth below)
exclude some or all Registrable Securities from such registration and
underwriting. In the event of such a limitation, the Company shall so advise
all Holders requesting registration, and the number of shares or securities
that may be included in the registration and underwriting shall be allocated
in the following manner: The securities of the Company held by officers and
directors of the Company (other than Registrable Securities and other than
securities held by persons who, by virtue of contracts with the Company, are
entitled to include their securities in such registration) shall be excluded
from such registration and underwriting to the extent required by such
limitation, and, if a further limitation of the number of shares is required,
the number of shares that may be included in the registration and
underwriting shall be allocated among all other holders (including Holders of
Registrable Securities, but excluding all holders of contractual registration
rights whose exercise of a demand right has caused the Company to initiate
the registration) thereof in proportion, as nearly as practicable, to the
respective amounts of securities (including Registrable Securities) which
would otherwise be entitled to inclusion in such registration held by such
Holders or holders at the time of filing the
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<PAGE>
registration statement. In no event shall the operation of the foregoing
allocation provisions result in a reduction of the number of securities
registered on behalf of holder of contractual registration rights whose
exercise of a demand right has caused the Company to initiate the
registration. If any Holder disapproves of the terms of any such
underwriting, such Holder may elect to withdraw therefrom by written notice
to the Company and the underwriter. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall be withdrawn
from such registration.
(iv) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 5(d) that the selling
Holders shall furnish to the Company such information regarding themselves,
the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to effect the
registration of their Registrable Securities.
(v) As used in this Section 5(d)(v), "Registration Expenses"
shall mean all expenses incurred by the Company in complying with this
Section 5(d), including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel for the Company,
blue sky fees and expenses, and the expense of any special audits incident to
or required by any such registration; and "Selling Expenses" shall mean all
underwriting discounts and selling commissions applicable to the sale, and
all fees and disbursements of counsel employed by any Holder or Holders. All
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to this Section 5(d) shall be borne by
the Company; and all Selling Expenses shall be borne by the Holders of the
securities so registered, pro rata on the basis of the number of shares so
registered and sold.
(vi) The rights to cause the Company to register Registrable
Securities pursuant to this Section 5(d) may be assigned by a Holder to: (x)
any member of the Affiliated Group; and (y) any other transferee or assignee
of Registrable Securities holding at least one percent (1.0%) of the
outstanding shares of Common Stock, as calculated on an Exercised Basis;
PROVIDED the Company is, within a reasonable time after any such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights
are being assigned; and PROVIDED, FURTHER, that such assignment shall be
effective only if immediately following such transfer the further disposition
of such securities by the transferee or assignee is restricted under the Act.
(vii) The rights to registration granted under this Section
5(d) shall terminate as to any Holder holding in the aggregate Registrable
Securities comprising less than one percent (1.0%) of the outstanding shares
of Common Stock, as calculated on an Exercised Basis.
(e) WAIVER OF DISSENTERS' RIGHTS. NEC and the Affiliated Group
shall be prohibited from exercising any dissent or appraisal rights that any
of them may have under RCW Ch. 23B.13 (or under other applicable corporations
laws) relative to any proposed acquisition of the Company (whether effected
by merger, share exchange or otherwise) in which NEC would receive registered
shares of the acquirer's stock and for
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which the acquirer desires to account on a pooling-of-interests basis, except
to the extent that such exercise would not (in the opinion of the acquirer's
independent accountants) diminish or cast doubt upon the transaction's
eligibility for such accounting treatment.
6. STANDSTILL OBLIGATIONS. As an essential element of the investment
transactions described herein, the parties agree to the following
restrictions and procedures:
(a) OWNERSHIP LIMIT. The Affiliated Group shall not purchase or
acquire (other than as a result of an Involuntary Increase) any Common Stock
(or any option, right or warrant to acquire, or security convertible or
exchangeable into, Common Stock) under the following circumstances: (i) if
such purchase or acquisition would result in the Affiliated Group holding, in
the aggregate, more than 9.99% of the outstanding shares of Common Stock, as
calculated on an Exercised Basis; or (ii) if the Affiliated Group already
holds more than 9.99% of the outstanding shares of Common Stock, as
calculated on an Exercised Basis, as a result of either (x) an Involuntary
Increase or (y) purchases or acquisitions during a period in which this
Section 6(a) was temporarily inapplicable under Section 6(b) below.
(b) APPLICABILITY OF LIMIT. The limitations described in Section
6(a) above may become inapplicable to the following extent in the following
circumstances:
(i) In the event that: (x) a formal proposal is presented
to the Board, relating to a proposed acquisition from the Company or any of
its officers or directors of shares of the Company's Common Stock (or any
option, right or warrant to acquire, or security convertible or exchangeable
into, Common Stock), by any party (acting alone or in combination with other
persons as a Group); and (y) that party or Group would as a result of the
proposed acquisition hold 10.0% or more of the Company's outstanding voting
stock, as calculated on an Exercised Basis; and (z) after considering such
proposal, the Board determines to pursue active negotiations with such party
or Group relative to the proposed acquisition of such a percentage; PROVIDED,
that if the Board thereafter determines, and notifies NEC in writing that it
has determined, to abandon such negotiations, then the limitations imposed
under Section 6(a) above shall again become applicable; or
(ii) In the event that a majority of the Qualified Directors
determines to waive, modify or terminate the limitations described in Section
6(a) above, either generally or with respect to specific circumstances, then
such limitations shall be inapplicable to the extent expressly specified in
the Board's formal resolutions setting forth such determination.
(c) NOTICE OF EXCESS SHARE ACQUISITIONS. In the event that the
Affiliated Group acquires (other than as a result of an Involuntary Increase)
any Common Stock (or any option, right or warrant to acquire, or security
convertible or exchangeable into, Common Stock) in excess of the limit
described in Section 6(a)(i) above (even if such limit is then inapplicable
under Section 6(b)(i) or (ii) above), NEC
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<PAGE>
shall promptly notify the Company in writing of each such acquisition which
is in excess of such limit.
(d) NO ANTITAKEOVER IMPLICATIONS. The parties acknowledge and
agree that neither the existence of, nor the occurrence of events rendering
operative, the standstill exclusions described in Section 6(b)(i) or (ii)
above shall be deemed to constitute implied or explicit Board approval of the
Affiliated Group's acquisition of beneficial ownership of ten percent or more
of the Company's outstanding voting shares for purposes of RCW Ch. 23B.19,
the terms of which are incorporated herein by this reference. Additionally,
nothing contained in this Section 6 shall be deemed to implicitly or
explicitly prevent or limit the Company from adopting such shareholder rights
plans and other contractual or organic antitakeover protections as the Board
may in its discretion deem appropriate.
(e) MORE FAVORABLE TERMS. If, prior to exercise or expiration of
the Warrant, the Company sells 7.5% or more of its outstanding voting stock
(calculated on an Exercised Basis) to any other purchaser (or Group of
purchasers) on terms which involve standstill restrictions more favorable to
the purchaser (or Group) than those applicable to the Affiliated Group under
this Section 6, with the result that the investment terms afforded to the
purchaser (or Group) are on the whole more favorable to the purchaser (or
Group) than those afforded to NEC under this Agreement, then the Company will
so notify NEC in writing and, at NEC's election, will amend the terms of this
Section 6 to afford equally favorable standstill terms to the Affiliated
Group.
7. NOTIFICATION AND DELAY PROCEDURES.
(a) NOTICE OF PROPOSALS. The Company will provide to NEC
immediate written notice upon receipt of a proposal of the type specified in
both clauses (x) and (y) of Section 6(b)(i) above (a "10% Proposal"). The
Company will also provide NEC with immediate written notice (a "Negotiating
Notice") upon a decision by the Board to pursue negotiations as described in
clause (z) of Section 6(b)(i) above, or to seek offers for an acquisition of
the Company, or to issue any proposal for the non-public sale of the
Company's voting stock, securities convertible into voting stock, or options
to acquire voting stock if the purchaser (or purchasing Group) would have the
right to acquire 10.0% or more of the Company's outstanding voting stock, as
calculated on an Exercised Basis. Upon receipt of a Negotiating Notice from
the Company, NEC may submit its own good faith proposal (an "NEC Proposal")
to the Board relating to a proposed acquisition of, or such other additional
investment in, the Company as NEC may desire to make in response to the
Negotiating Notice.
(b) DELAY PERIOD. The Company will refrain from entering into a
binding letter of intent or definitive purchase or acquisition documents
relating to a 10% Proposal for two (2) full business days after giving NEC a
Negotiating Notice, in order to permit NEC to consider its options and
alternatives. If, during such two-day period, NEC submits an NEC Proposal
which the Board in good faith deems to be superior to all other acquisition
and investment offers and proposals received, but which has not been formally
approved by NEC's board of directors, then the Company will provide
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<PAGE>
NEC written notice to that effect ("Consideration Notice") and will continue
to so refrain until the earlier of (i) the next meeting of NEC's board of
directors for which NEC is able to place its proposal on the agenda, or (ii)
thirty-five (35) calendar days after providing the Consideration Notice to
NEC; PROVIDED, that if, while the Company is so refraining, the Board should
determine in good faith that the NEC Proposal is no longer superior to all
other offers and proposals received, then the Company will immediately so
notify NEC in writing and will thereafter be obligated to continue so
refraining for only five (5) additional calendar days after giving such
notification unless within such period NEC submits a new NEC Proposal which
the Board in good faith deems superior to all other acquisition and
investment offers and proposals received, in which case, if the new NEC
Proposal has not been approved by NEC's board of directors, the Company will
provide another Consideration Notice to NEC and will refrain until the
earlier to expire of the time periods described in clauses (i) and (ii) above.
(c) TERMINATION OF PROCEDURE. The requirements of this Section 7
shall terminate at such time as the Affiliated Group no longer holds at least
5.0% of the Company's voting stock, as calculated on an Exercised Basis.
(d) CONFIDENTIALITY REQUIREMENT. All information contained in any
notices given to NEC by the Company pursuant to this Section 7 shall be
deemed confidential information of the Company and, until such information is
made publicly available by the Company or other parties through no act or
fault of NEC or the Affiliated Group, shall not be disclosed or made
available by NEC to any third party, other than those of its own officers,
directors, investment bankers and professional advisors who have a need to
know such information in order to assist with preparation of an NEC Proposal
and are bound by the terms of their employment or engagement to maintain the
confidentiality thereof. NEC acknowledges that federal and state securities
laws impose civil liabilities and criminal sanctions upon persons who engage
in purchasing or selling of securities while in possession of material
non-public information concerning the issuer, and accordingly agrees to take
such precautions as may be reasonably necessary to prevent members of the
Affiliated Group, or their officers, directors, employees or agents, from
trading in shares of the Company's stock while in possession of material
non-public information of or concerning the Company.
(e) PRIOR LETTER. The provisions of this Section 7 supersede in
their entirety the provisions of that certain "Right of Notification" dated
November 2, 1998, delivered by Mr. Bard Richmond to NEC, which shall be of no
further force or effect.
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8. CLOSING.
(a) TIME AND PLACE. The initial closing of the transactions
contemplated by Sections 1 and 2 hereof shall be held on May 17, 1999, at the
offices of Graham & James LLP/Riddell Williams P.S. in Seattle, Washington.
Any subsequent closing pursuant to Section 1 hereof shall be held at the same
place on the date specified by the Company in its notice to NEC pursuant to
Section 1.
(b) NEC'S CLOSING CONDITIONS. NEC's obligations to purchase Notes
pursuant to Section 1 of this Agreement shall be subject to the satisfaction
(or, at NEC's election, the waiver) of each of the following conditions: (i)
receipt from the Company of evidence, in form satisfactory to NEC's counsel,
that all requisite corporate approvals have been obtained as described in
Section 3(b) above; (ii) delivery of the Note for the amounts being advanced
at such closing; (iii) delivery of the Warrant at the initial closing under
this Agreement; (iv) the representations of the Company set forth in Section
3 above shall be true and correct in all material respects as of each such
closing; and (v) the Company shall not have declared bankruptcy or admitted
its insolvency, become the subject of a petition in any bankruptcy,
receivership or other insolvency proceeding, or be in default under the terms
of any notes or agreements relating to any other material obligation of the
Company for moneys borrowed, including this Agreement or any Note issued
hereunder.
(c) COMPANY'S CLOSING CONDITIONS. The Company's obligations to
issue and sell Notes and the Warrant pursuant to Sections 1 and 2 of this
Agreement shall be subject to the satisfaction (or, at the Company's
election, the waiver) of each of the following conditions: (i) receipt from
NEC of evidence, in form satisfactory to the Company's counsel, that all
requisite corporate approvals have been obtained as described in Section 4(b)
above; (ii) delivery in cash or by wire transfer or bank cashier's check of
the principal amount of the Note to be issued at each closing hereunder; and
(iii) the representations of NEC set forth in Section 4 above shall be true
and correct in all material respects as of each closing hereunder.
9. CERTAIN DEFINITIONS. Certain capitalized terms used in this
Agreement have the meanings assigned to them in various sections of this
Agreement. In addition, as used in this Agreement, the following capitalized
terms shall have the following meanings:
(a) "AFFILIATED GROUP" shall mean NEC or any corporation,
partnership or other entity of which NEC directly or indirectly owns or
controls 50% or more of the financial interests or voting power.
(b) "BOARD" shall mean the Board of Directors of the Company, as
duly elected from time to time in accordance with applicable corporations
laws.
(c) "COMMON STOCK" shall initially mean the Company's Common Stock
as currently outstanding, and shall thereafter mean any shares of any class
of capital stock resulting from any reclassification thereof or otherwise
issued, which have
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<PAGE>
no preference in respect of dividends or of amounts payable in the event of
voluntary or involuntary liquidation, dissolution or winding up, and which
are not subject to redemption by the Company.
(d) "EXERCISED BASIS" shall mean that, for purposes of calculating
any person's percentage ownership of any class of capital stock, all
securities held by such person (but not those held by other persons) which
are convertible into, exchangeable for or exercisable for shares of such
class shall be assumed to be fully converted into, exchanged or exercised for
shares of such class.
(e) "GROUP" shall mean any "group" as defined by Sections 13(d)(3)
and 14(a)(2) of the Securities Exchange Act of 1934, as amended.
(f) "INVOLUNTARY INCREASE" shall mean, with respect to any person:
(i) the purchase or acquisition of capital stock (or securities convertible
into, or exchangeable or exercisable for shares of capital stock) by such
person as a result of any stock split, stock dividend, distribution, rights
offering, recapitalization or reclassification, any of which has been
approved by a majority of Qualified Directors; or (ii) any increase in such
person's percentage ownership of any class of capital stock as a result of
redemptions or repurchases of shares of such class which have been approved
by a majority of Qualified Directors.
(g) "QUALIFIED DIRECTORS" shall mean duly elected members of the
Board who (i) satisfy the criteria set forth in RCW 23B.08.720(4), (ii) have
no material ongoing business or professional relationship with any member of
the Affiliated Group, and (iii) have not been elected to the Board at the
request of or as a result of the direct or indirect influence of any member
of the Affiliated Group.
(h) "RCW" shall mean the Revised Code of Washington, as amended
from time to time.
10. MISCELLANEOUS PROVISIONS.
(a) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which, when so executed and delivered, shall constitute an original;
the parties agree that upon execution of counterparts by both parties hereto,
the executed signature pages of each shall be bound together into one or more
executed originals of the Agreement.
(b) NO BROKERS. Each of the parties warrants to the other that no
broker or finder has acted for any such party in connection with this
Agreement or the transactions contemplated herein, and that no broker or
finder is entitled to any brokerage or finder's fee or other commission in
respect hereof.
(c) SUCCESSORS, ASSIGNS. Except to the extent that the
application of certain provisions hereof to transferees and assignees of
Registrable Securities is expressly limited, this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
successors and assigns. Without limiting the foregoing, this
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Agreement (specifically including, without limitation, Sections 5, 6 and 7(d)
hereof) shall be binding upon all members of the Affiliated Group, and NEC
shall take all steps necessary to ensure that the terms hereof are fully and
faithfully observed by each member of the Affiliated Group. The Company may
require, as a condition to transferring any securities to any member of the
Affiliated Group, that the transferee execute a counterpart hereof agreeing
to be bound by the restrictions imposed by Sections 5, 6 and 7(d) of this
Agreement.
(d) NOTICES. Any notice or written communication herein required
or permitted to be given shall be in writing and shall be deemed to have been
given when (i) actually delivered by messenger, overnight delivery or
facsimile transmission, or (ii) three (3) days after being deposited in the
United States Mails, certified or registered, postage prepaid, in each case
addressed (until written notice of a new address has been given to each of
the other parties) as follows: (x) if to the Company, to:
Active Voice Corporation
2901 Third Avenue
Seattle, WA 98121
Attn: Chief Executive Officer
Facsimile: (206) 441-4784
With a copy to:
Active Voice Corporation
2901 Third Avenue
Seattle, WA 98121
Attn: General Counsel
Facsimile: (206) 441-4784
(y) if to NEC, to:
NEC Corporation
Legal and Administration Division
F-1, Shiba 5-chome, Minato-ku
Tokyo 108-8001, Japan
Attn: M. Sakamoto
Facsimile: 8-00-01-722-7001
With a copy to:
NEC USA
8 Corporate Center Drive
Melville, NY 11747
Attn: Timothy Donovan
Facsimile: (516) 753-7663
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<PAGE>
(e) GOVERNING LAW. This Agreement and the Notes, the Warrant and
other securities issued hereunder and thereunder, and the other obligations
created hereunder and thereunder, shall be deemed contracts made under the
laws of the State of Washington and shall be governed and construed in
accordance with the laws of said State. In the event of any dispute arising
under this Agreement, the Notes or the Warrant, the parties consent to the
jurisdiction of the courts of the State of Washington, and agree that venue
shall be laid in King County. In the event of any such dispute between any
of the parties hereto concerning this Agreement, the Notes or the Warrant, or
in the event legal action is commenced with respect to this Agreement, the
Notes, the Warrant or other securities issued hereunder, or any other
obligation arising hereunder or thereunder, all reasonable costs and
attorney's fees, including fees on appeal, incurred by the prevailing party
or parties in such litigation shall be determined by the court and assessed
against the non-prevailing party, or parties.
(f) EQUITABLE RELIEF. The parties acknowledge that a breach by
NEC or any other member of the Affiliated Group of various provisions of this
Agreement (including, without limitation, Sections 5, 6 or 7(b)) would cause
the Company irreparable harm not readily calculable or compensable by a
monetary reward. It is therefore agreed that the Company shall have the
right to obtain equitable relief in order to enforce, and prevent violations
of, the provisions of this Agreement.
(g) SEVERABILITY. If any provision of this Agreement, or of the
Notes or the Warrant, or the application of any such provision to any person
or circumstances, shall be held invalid, the remaining provisions of this
Agreement, and the Notes and the Warrant, and the application of such
provision to persons or circumstances other than those as to which it is held
invalid, shall not be affected thereby.
(h) ENTIRE AGREEMENT. This Agreement and the documents attached
hereto and delivered pursuant hereto constitute the entire agreement of the
parties respecting the subject matter hereof, and supersede any and all prior
agreements and understandings respecting the same subject matter, including
without limitation the provisions of that certain letter agreement between
the parties dated February 19, 1999. There are no other oral or implied
understandings between the parties with respect to this subject. Except as
expressly otherwise provided herein, this Agreement may not be modified, nor
may any rights hereunder be waived or abridged, orally or by course of
dealing, but only by a written instrument signed by both parties hereto. The
consent of the Company to any amendment of Section 6 hereof (or of this
Section 10(h)) shall, however, require the approval of a majority of
Qualified Directors.
(i) CAPTIONS. Headings of the various sections and subsections of
this Agreement have been inserted for convenience of reference only, and
shall not be relied upon in construing this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the day and year first above written.
NEC CORPORATION ACTIVE VOICE CORPORATION
By: /s/ Hideaki Kihara By: /s/ Frank J. Costa
----------------------------------- -------------------------------
Title: V.P. Switching & Mobile Systems, Title: President & CEO
-------------------------------- ----------------------------
Operations Unit Date: May 5, 1999
- --------------------------------------- -----------------------------
Date: May 5, 1999
---------------------------------
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EXHIBIT A
------------------------------------------------------------
NOTICE: RESTRICTION ON TRANSFER AND OTHER MATTERS
The securities represented hereby have not been registered
under the Securities Act of 1933 or any state securities
law, and may not be offered, sold, transferred, encumbered
or otherwise disposed of except upon satisfaction of certain
conditions, which are set forth in that certain "Investment
Agreement" dated May 5, 1999, which also contains various
other provisions affecting these securities, binding upon
transferees hereof. Information concerning these
restrictions and provisions may be obtained from the
corporation or its legal counsel. Any offer or disposition
of these securities without satisfaction of said conditions
will be wrongful, and will not entitle the transferee to
register ownership of the securities with the corporation.
------------------------------------------------------------
PROMISSORY NOTE
$______________ Seattle, Washington
May 5, 1999
FOR VALUE RECEIVED, the undersigned Active Voice Corporation
("Borrower") promises to pay to the order of NEC Corporation ("NEC") at its
office at 7-1, Shiba 5-chrome, Minato-ku, Tokyo 108-8001, Japan, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of
______________________________ Dollars ($____________), with interest thereon
as set forth herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 365-day year, actual
days elapsed) at a rate per annum equal to seven and eight-tenths
percent (7.8%).
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be
payable annually commencing one year from the date of this Note
to the wire transfer account designated by NEC from time to time.
(c) DEFAULT INTEREST. From and after the maturity date of this Note,
or such earlier date as all principal owing hereunder becomes due
and payable by acceleration or otherwise, the outstanding
principal balance of this Note shall bear interest until paid in
full at a rate per annum (computed on the
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<PAGE>
basis of a 365-day year, actual days elapsed) equal to twelve
percent (12%).
REPAYMENT AND PREPAYMENT:
(a) REPAYMENT. Principal and any remaining unpaid interest shall be
payable on May 5, 2002.
(b) PREPAYMENT. Borrower may make a single prepayment of all or any
portion of the principal and remaining unpaid interest on this
Note at any time after May 5, 2000.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions
of that certain Investment Agreement between Borrower and NEC dated as of May
5, 1999, (the "Investment Agreement").
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any other Note executed by Borrower
pursuant to the Investment Agreement.
(b) The filing of a petition by or against Borrower under any
provisions of the Bankruptcy Reform Act, Title 11 of the United
States Code, as amended or recodified from time to time, or under
any similar or other law relating to bankruptcy, insolvency,
reorganization or other relief for debtors; the appointment of a
receiver, trustee, custodian or liquidator of or for any part of
the assets or property of Borrower; Borrower becomes insolvent,
makes a general assignment for the benefit of creditors or is
generally not paying its debts as they become due; or any
attachment or like levy on any property of Borrower; provided
that if any such filing is involuntary, the Company shall have
forty-five (45) days to seek dismissal of the petition.
(c) The dissolution or liquidation of Borrower.
(d) Any default in the payment or performance of any obligation, or
any defined event of default, under any contract, instrument or
document pursuant to which Borrower has incurred any material
obligation for borrowed money, which default has not been timely
cured and has resulted in an acceleration of the due date of such
obligation.
(e) Any financial statement provided by Borrower to NEC in connection
with the execution of this Note proves to be incorrect, false or
misleading in any material respect.
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<PAGE>
(f) Any sale or transfer of all or substantially all of the assets of
Borrower other than in the ordinary course of its business.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the
holder of this Note, at the holder's option, may declare all sums
of principal and interest outstanding hereunder to be immediately
due and payable without presentment, demand, notice of
nonperformance, notice of protest, protest or notice of dishonor,
all of which are expressly waived by Borrower. Borrower shall
pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and
reasonably allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any
amounts which become due to the holder under this Note, and the
prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory
relief whether incurred at the trial or appellate level or
otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion
brought by NEC or any other person) relating to Borrower.
(b) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FORBEAR ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
NEC CORPORATION ACTIVE VOICE CORPORATION
By: ________________________________ By: ________________________________
Printed Name: ______________________ Printed Name: ______________________
Title: _____________________________ Title: _____________________________
Date: ______________________________ Date: ______________________________
17
<PAGE>
EXHIBIT B
------------------------------------------------------------
NOTICE: RESTRICTION ON TRANSFER AND OTHER MATTERS
The securities represented hereby have not been registered
under the Securities Act of 1933 or any state securities
law, and may not be offered, sold, transferred, encumbered
or otherwise disposed of except upon satisfaction of certain
conditions, which are set forth in that certain "Investment
Agreement" dated May 5, 1999, which also contains various
other provisions affecting these securities, binding upon
transferees hereof. Information concerning these
restrictions and provisions may be obtained from the
corporation or its legal counsel. Any offer or disposition
of these securities without satisfaction of said conditions
will be wrongful, and will not entitle the transferee to
register ownership of the securities with the corporation.
------------------------------------------------------------
COMMON STOCK PURCHASE WARRANT
May __, 1999 500,000 SHARES
THIS COMMON STOCK PURCHASE WARRANT (the "Warrant") is entered into,
effective as of May 5, 1999, by Active Voice Corporation, a Washington
corporation (the "Company"), and NEC Corporation, a corporation organized
under the laws of Japan (the "Holder"). The Company and the Holder are
referred to collectively herein as the "Parties."
R E C I T A L S
WHEREAS, the Holder has agreed to invest up to $6,500,000 in the Company
pursuant to that certain "Investment Agreement" dated May 5, 1999 (the
"Investment Agreement"), the terms of which are incorporated herein by this
reference; and
WHEREAS, the Investment Agreement provides for the issuance of certain
stock purchase warrants to Holder as partial consideration for the
investments made by Holder thereunder.
NOW, THEREFORE, the Parties covenant and agree as follows:
FOR VALUE RECEIVED, the Company hereby grants to the Holder the right to
purchase from the Company up to Five Hundred Thousand (500,000) shares of the
Company's Common Stock (no par value) at a price of Thirteen Dollars ($13.00)
per
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<PAGE>
share (the "Initial Exercise Price"). This Warrant is exercisable
immediately upon delivery to the Holder, and shall remain exercisable until
the earlier of (a) the date on which it has been exercised for the full
number of shares subject to purchase hereunder or (b) 5:00 p.m., Pacific
Time, on May 5, 2002 (the "Expiration Date") at which time this Warrant shall
expire and thereafter be no longer exercisable.
11. EXERCISE PERIOD AND PROCEDURES. This Warrant may be exercised,
either for the full number of shares then exercisable hereunder or any part
thereof involving an aggregate Exercise Price of not less than $100,000 (or
such lesser amount as may be sufficient to purchase all shares remaining
subject to purchase hereunder), on one or more occasions, at any time from
the date of issuance hereof through the Expiration Time (the "Exercise
Period"). This Warrant will be deemed exercised upon delivery by the Holder
to the Company at its principal business offices of: (i) a completed Exercise
Agreement in the form attached hereto as Exhibit A; (ii) this Warrant; and
(iii) payment (in cash, or by wire transfer or bank cashier's check) to the
Company of the full Exercise Price (as determined under Section 2 below) for
the number of shares being purchased (collectively, the "Exercise
Conditions"). The Holder may also elect (by so specifying on Exhibit A) to
pay part or all of the Exercise Price hereunder by surrendering and
cancelling part or all of the unpaid principal amount due under Notes issued
to the Holder under the Investment Agreement.
(a) Certificates for shares of Common Stock purchased upon
exercise of this Warrant will be delivered by the Company to the Holder
within ten business days after the satisfaction of the Exercise Conditions.
Unless all of the purchase rights represented hereby have been exercised, the
Company will prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
been exercised and will, within such ten-day period, deliver such new Warrant
to the Holder.
(b) The Common Stock issuable upon the exercise of this Warrant
will be deemed to have been issued on the day on which the Exercise
Conditions have been satisfied, and the Holder will be deemed for all
purposes to have become the record holder of such Common Stock at such time.
(c) The issuance of certificates for shares of Common Stock upon
exercise of this Warrant will be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Common
Stock. The shares of Common Stock issuable upon exercise of this Warrant
will, upon payment of the Exercise Price therefor, be fully paid and
nonassessable shares of the Company's Common Stock.
(d) The Company will from time to time take all such action as may
be necessary to assure that the par value (if any) per share of the unissued
Common Stock acquirable upon exercise of this Warrant is at all times equal
to or less than the Exercise Price then in effect; and that the Company has
authorized, and reserved for issuance hereunder, a sufficient number of
shares of its Common Stock to provide for the full exercise of the rights
represented hereby.
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<PAGE>
12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The Initial
Exercise Price shall be subject to adjustment from time to time (such price,
as last adjusted, being herein referred to as the "Exercise Price"), and the
number of shares of Common Stock obtainable upon exercise of this Warrant
shall likewise be subject to adjustment from time to time, as follows:
(a) If the Company at any time after the date of the initial
closing under the Investment Agreement subdivides (by any stock split, stock
dividend, recapitalization or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision will be proportionately reduced and the
number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time combines (by
reverse stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect immediately prior to such combination will be proportionately
increased and the number of shares of Common Stock obtainable upon exercise
of this Warrant will be proportionately decreased.
(b) Any capital reorganization (including, without limitation, any
issuance or distribution for less than fair market value to holders of Common
Stock of any shares of capital stock or other securities, options, warrants
or rights of the Company), reclassification, statutory share exchange,
consolidation, merger, or sale of all or substantially all of the Company's
assets to another person, which is effected in such a way that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets (other than cash) with respect to or
in exchange for Common Stock, is referred to herein as an "Organic Change."
Prior to the consummation of any Organic Change, the Company will make
appropriate provision to insure that the Holder will thereafter have the
right to acquire (upon payment of the Exercise Price plus any additional
consideration paid by other shareholders for such issued or distributed
securities or assets) and receive in lieu of or in addition to the shares of
Common Stock immediately theretofore acquirable and receivable upon the
exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares
of Common Stock immediately theretofore acquirable and receivable upon
exercise of this Warrant had such Organic Change not taken place; and the
various provisions of this Warrant will thereafter continue to be applicable,
subject only to equitable adjustments and modifications required in order to
conform the terms hereof to the circumstances pertaining after such Organic
Change. The Company will not effect any such statutory share exchange,
consolidation, merger, or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from
consolidation or merger or the corporation acquiring such shares or such
assets assumes by written instrument the obligation to deliver to such Holder
such shares of stock, securities or assets as such Holder may be entitled to
acquire in accordance with the foregoing provisions.
(c) Immediately upon any adjustment of the Exercise Price, the
Company will give written notice thereof to the Holder. The Company will
also give
20
<PAGE>
written notice to the Holder at least fifteen (15) days prior to the date on
which any Organic Change is anticipated to take place or to be voted on,
whichever is earlier.
13. NO VOTING RIGHTS; LIMITATION OF LIABILITY. This Warrant will not
entitle the Holder to any voting rights or other rights as a shareholder of
the Company, until and then only to the extent it has been exercised as
provided herein. No provision hereof, in the absence of affirmative action
by the Holder to purchase Common Stock, shall give rise to any liability of
such Holder for the Exercise Price of Common Stock acquirable by exercise
hereof or as a shareholder of the Company.
14. SECURITIES LAWS COMPLIANCE.
(a) The Holder understands and acknowledges that neither this
Warrant nor any of the shares of Common Stock subject to purchase hereunder
have, at the time of issuance of this Warrant, been registered under the
Securities Act of 1933, as amended (the "Act") or any applicable state
securities laws. This Warrant and all such shares issuable hereunder are
instead being issued pursuant to certain exemptions from registration under
the Act and applicable state securities laws, in reliance upon
representations and agreements made by the Holder in the Investment
Agreement, the terms of which are incorporated herein by this reference.
(b) Holder acknowledges that, except as otherwise specifically
provided in Section 5(d) of the Investment Agreement, it has no right to
require registration of this Warrant or any shares of Common Stock acquired
pursuant to exercise of this Warrant under the Act or any applicable state
securities laws.
15. TRANSFER RESTRICTIONS. This Warrant and all rights hereunder are
non-transferable, in whole or in part. In addition, all shares of Common
Stock issuable hereunder are subject to transfer restrictions arising under
Sections 5 and 7(d) of the Investment Agreement.
16. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Company, or, in the case of any such mutilation upon surrender of such
certificate, the Company will (at its expense) execute and deliver in lieu of
such certificate a new certificate of like kind representing the same rights
represented by such lost, stolen, destroyed or mutilated certificate and
dated the date of such lost, stolen, destroyed or mutilated certificate.
17. INVESTMENT AGREEMENT PROVISIONS. This Warrant is also subject to
and governed by the following provisions of the Investment Agreement, which
are incorporated herein by this reference: 10(d) (Notices); 10(e) (Governing
Law); 10(g) (Severability); 10(h) (Entire Agreement); and 10(i) (Captions).
21
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
attested by its duly authorized officers as of the date first above written.
ACTIVE VOICE CORPORATION
By: ________________________________
Printed Name: ______________________
Title: _____________________________
Date: ______________________________
22
<PAGE>
EXHIBIT A
EXERCISE AGREEMENT
To: Active Voice Corporation
The undersigned, pursuant to the provisions set forth in the attached
Common Stock Purchase Warrant (the "Warrant"), hereby agrees to subscribe for
and purchase _______________ shares of Common Stock covered by such Warrant
and makes payment herewith in full therefor at the Exercise Price per share
provided by such Warrant.
[ADD IF APPLICABLE:]
[The undersigned further hereby elects to apply to the payment of such
Exercise Price the sum of $______________ out of the unpaid principal balance
of the attached Note No. __________, which was issued by the Company to the
undersigned pursuant to that certain "Investment Agreement" dated May __,
1999. The Company is hereby authorized and instructed to cancel such Note and
reissue a replacement therefor reflecting a principal balance reduced by such
sum.]
NEC CORPORATION
By: ________________________________
Printed Name: ______________________
Title: _____________________________
Date: ______________________________
23
<PAGE>
M A S T E R P U R C H A S E A G R E E M E N T
BETWEEN
NEC CORPORATION
and
ACTIVE VOICE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. MPA CONSTRUCTION AND USE........................................ 2
2. PRODUCTS AND DEVELOPMENT........................................ 3
3. LICENSES........................................................ 6
4. LICENSE RESTRICTIONS............................................ 8
5. OWNERSHIP....................................................... 9
6. PRICING AND COMPENSATION........................................10
7. REPORTS AND PAYMENTS............................................11
8. NECAM APPOINTMENT AS RELATIONSHIP MANAGER.......................13
9. TERM AND TERMINATION............................................13
10. CONFIDENTIALITY.................................................14
11. WARRANTIES......................................................15
12. INDEMNIFICATION AND LIMITATION OF LIABILITY.....................17
13. DISPUTE RESOLUTION AND ARBITRATION..............................19
14. ADDITIONAL TERMS................................................19
</TABLE>
EXHIBITS A DEFINITIONS
B SPECIFIC PRODUCT ADDENDA
C GENERAL DEVELOPMENT PROVISIONS
D SUPPORT PLANS
E TRAINING PROGRAMS
F MINIMUM END USER TERMS
G INDEMNIFIED COUNTRIES
H AFFILIATE ENROLLMENT
I TRADE SECRET TRANSMITTAL FOR AAINFO
<PAGE>
MASTER PURCHASE AGREEMENT
This Master Purchase Agreement (the "Agreement") is made as of the 5th day of
May, 1999 ("Effective Date"), by and between:
ACTIVE VOICE CORPORATION, a Washington corporation, having its
principal place of business at 2901 Third Avenue, Seattle, Washington,
98121 ("Active Voice"), and
NEC CORPORATION, a Japanese corporation with its registered offices at
7-1, Shiba-Chome, Minato-ku, Tokyo, 108-01 Japan ("NEC").
Each entity shall hereafter be referred to as a "Party" and jointly as
the "Parties."
RECITALS
I. Active Voice develops, manufactures and distributes certain
software and hardware communications products in the voicemail and
computer telephony market segments.
II. NEC develops, manufactures and distributes certain personal and
business communications products, including products in the
voicemail and computer telephony market segments.
III. Active Voice and NEC have entered previously into the following
agreements and amendments thereto:
A. NEC/J REPLAY AGREEMENT: Agreement Between Active Voice and
NEC, between Active Voice and NEC Corporation, dated July 27,
1993.
B. NEC/J PHONEMAX AGREEMENT: License and Development Agreement,
between Active Voice and NEC Corporation, dated March 1, 1996.
(1) JANUARY 16, 1998, Amendment to License and Development
Agreement.
C. NEC/J AD-8 AGREEMENT: Agreement, between Active Voice and NEC
Corporation, dated February 3, 1998; amended as follows:
(1) FEBRUARY 18, 1998, amendment.
D. NEC/AUSTRALIA AD-8 AGREEMENT: Agreement, between Active Voice
and NEC Pty. Ltd., dated November 24, 1998.
E. NECAM AGREEMENT: Original Equipment Manufacturer Purchase
Agreement, between Active Voice and NEC America, Inc., dated
November 23, 1994; amended as follows:
(1) AUGUST 31, 1995, amendment to include additional
modifications to the computer program designated by
Active Voice as Replay Plus for the NEAX-Registered
Trademark-2000 IVS, NEAX-Registered Trademark-2400 IMS
(ICS). and Electra Professional ICTS;
(2) FEBRUARY 9, 1996, amendment to include private
labeled computer program products designated by Active
Voice as PhoneMax;
(3) JULY 1, 1996, amendment, to expand territories,
establish site license pricing and change the renewal
notice period;
(4) JULY 9, 1996, amendment, to include the Active Voice
In-Switch Voice Mail product;
(5) AUGUST 7, 1997, amendment to include as to the Active
Voice In-Switch Voice mail product for the NEC Electra
Professional switch;
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<PAGE>
(6) DECEMBER 23, 1997, amendment to include the Phone Max
private labeled product;
(7) FEBRUARY 24, 1998, amendment to include a Product
Discontinuation Notice period and the NEAXMAIL AD-8
product;
(8) APRIL 20, 1998, amendment to include the NEC
Lingo-TM- voice messaging system;
(9) JUNE 15, 1998, amendment to include the Active voice
NEAXMAIL-TM- AD-40 product;
(10) SEPTEMBER 4, 1998, amendment to include the Active
Voice Electra Mail CTI voice messaging system; and,
(11) SEPTEMBER 30, 1998, amendment to include Electra
Elite VMS InMail.
ACCORDINGLY, the Parties now desire to supersede the previous agreements and
amendments thereto by entering into this Master Purchase Agreement and
establishing a common structure and library of provisions for future product
agreements.
AGREEMENT
1. MPA CONSTRUCTION AND USE:
1.1 OVERVIEW: This Agreement is comprised of the main body of this
Agreement, the Exhibits, and any subsequent addenda, amendments or
attachments thereto.
1.2 MAIN BODY OF THE AGREEMENT: The main body of this Agreement
includes the terms and provisions which are capable of being
standardized or elected from across product lines. In certain
sections, (e.g., licenses, warranties, invoices and payments), the
main body of the Agreement includes alternate provisions which may
be selected from and designated as the selection in Specific
Product Addenda ("SPA"), discussed further in Section 1.4 below.
1.3 DEFINITIONS: Definitions are included in Exhibit A. If any SPA
sets forth a definition that differs from the definition given in
Exhibit A, the SPA definition shall govern for that SPA only and
not as to the Master Purchase Agreement or any other SPA or Exhibit
unless otherwise specifically stated.
1.4 SPAS: Each Active Voice product licensed and/or provided under
this Agreement, including the terms specifically pertinent thereto,
shall be set forth in a SPA. SPAs shall be effective upon mutual
execution and included as Addenda to Exhibit B. The face page of
Exhibit B shall list each valid SPA, and shall be updated to
reflect each new or discontinued SPA. Unless otherwise stated, the
term of each SPA shall be assumed to be five (5) years from the
Effective Date of such SPA. The MPA may not expire during the valid
term of any SPA and shall be deemed extended by the Parties for the
full duration of the last valid SPA. The Parties, however, may
terminate the MPA for breach, under the provisions of Section 9
below, and any termination of the MPA for breach shall constitute
termination of each SPA under the MPA. Unless otherwise stated in a
SPA, Active Voice shall not have the ability to terminate a SPA
without cause prior to expiration of such SPA; however, if Active
Voice discontinues the product that is the subject of the SPA, then
the provisions governing Product Discontinuance in Section 2.6
below shall apply. Each SPA shall include any product-specific
terms, including but not limited to Statements of Work, variations
in licensing terms and conditions, royalty schedules, pricing,
support plans and/or training programs.
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<PAGE>
1.5 AFFILIATES: This Agreement is initially executed by NEC. In the
event a NEC Affiliate desires and the Parties agree to have such
NEC Affiliate sign up as a direct Party to this Agreement, the
Parties shall amend this Agreement to add such NEC Affiliate via
an Enrollment Agreement, the form of which is attached as
Exhibit H. In addition, the face page of Exhibit H shall list
each NEC Affiliate that is enrolled as a Party to this
Agreement. For NEC Affiliates which are not enrolled as direct
Parties to this Agreement, the following provisions shall apply:
(a) ORDERING: NEC Affiliates which are not direct Parties to
this Agreement shall place orders for Active Voice
products through NEC or Enrolled Affiliates.
(b) DISTRIBUTOR TERMS: NEC Affiliates placing orders through
NEC or Enrolled Affiliates shall be deemed and treated as
NEC Distributors.
2. PRODUCTS AND DEVELOPMENT: The Parties agree to the following with
regard to products and development:
2.1 LICENSED SOFTWARE: Active Voice shall deliver the Licensed
Software to NEC in accordance with the provisions of the SPA
governing the Licensed Software. In addition, the following
provisions shall apply to New Releases, Maintenance Releases,
additional features and compatibility:
(a) NEW RELEASES:
(i) PROVISION OF NEW RELEASES: During the Term of the
Agreement, Active Voice agrees to offer New
Releases to NEC under mutually-agreeable terms and
conditions if Active Voice, in its sole
discretion, creates a New Release and makes such
New Releases publicly available to its customers
on a general basis.
(ii) INCORPORATION OF NEW RELEASES: If Active Voice
provides NEC with a New Release, NEC agrees to use
reasonable efforts to adopt such New Release in
NEC's next release of the applicable NEC Product,
and to cease shipping the previous release.
(b) MAINTENANCE RELEASES:
(i) PROVISION OF MAINTENANCE RELEASES: During the
Term of the Agreement, Active Voice agrees to
provide Maintenance Releases to NEC if Active
Voice, in its sole discretion, creates a
Maintenance Release and makes such Maintenance
Release publicly available to its customers on a
general basis.
(ii) INCORPORATION OF MAINTENANCE RELEASES: If Active
Voice provides NEC with a Maintenance Release, NEC
agrees to include such Maintenance Release in
NEC's next release of the NEC Products, and to
thereupon cease shipping the previous release. If,
however, Active Voice notifies NEC that continued
shipment of the prior release of the Licensed
Software might create liability for infringement
or breach of warranty, might result in loss of
customer goodwill, then NEC shall integrate such
Maintenance Release into its current applicable
NEC Product within ninety (90) days or within a
shorter period if possible to remedy potential
infringement, bugs or errors in the software or to
avoid claims for indemnification.
(c) ADDITIONAL FEATURES: The Parties shall negotiate in good
faith regarding the Specifications, terms and conditions
for prospective New or Maintenance Releases. Any request
for an additional feature not adopted by Active Voice may
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<PAGE>
be proposed by NEC to become the subject of a Statement
of Work. The Parties shall negotiate in good faith with
respect to the Statement of Work.
(d) COMPATIBILITY: Active Voice shall use its Best Efforts
to design new Releases and Maintenance Releases to be
compatible with previous versions of the general release
versions of the Licensed Software. The Parties, however,
recognize that any development unique or specific to NEC
might negatively impact the possibility of compatibility
between the Licensed Software and any New Releases or
Maintenance Releases. Accordingly, provided that Active
Voice has a valid business or engineering purpose for
taking a particular product or design path, the taking of
such alternate path shall not constitute a failure by
Active Voice to meet its obligations hereunder. In
addition, if Active Voice makes any New Release or
Maintenance Release available to NEC and NEC does not
adopt such New Release or Maintenance Release, the
Parties acknowledge that such non-adoption is likely
to negatively impact the possibility of future
compatibility. Finally, if any additional work is
required to attain compatibility between any NEC
Product and any New Release or Maintenance Release,
the Parties may mutually agree on a Statement of Work
for such project.
2.2 ACTIVE VOICE HARDWARE PRODUCTS:
(a) ORDERING AND FULFILLMENT: Active Voice will use its Best
Efforts to fill NEC's Active Voice Hardware Product
orders promptly, but the Parties agree that Active Voice
shall not be responsible for late delivery resulting
from: (i) any cause beyond its reasonable control, (ii)
production allocations of its vendors, or (iii) the
inability of its vendors to supply Active Voice. Active
Voice reserves the right to allocate its production
and/or inventory in any manner it chooses. However, in
the event of product shortages, Active Voice will use its
Best Efforts to fill NEC's orders.
(b) PURCHASE ORDERS: NEC will submit in writing firm
purchase orders for all Active Voice Hardware Products.
Such orders shall be subject to the provisions of this
Agreement. Any provision of a purchase order inconsistent
with this Agreement shall be null and void. Active Voice
shall use its Best Efforts to accept any NEC forecasts
and purchase orders; however, based on the considerations
set forth in Section 2.2(a)(i)-(iii) above, Active Voice
shall have the right to reject any NEC forecasts and
purchase orders. If an order is rejected, Active Voice
will provide notification to NEC within three (3)
business days or receipt. If Active Voice fails to issue
the notice of rejection within such three (3) day period,
NEC's purchase order shall be deemed to have been
accepted by Active Voice on the last day of such three
(3) day period.
(c) SHIPMENT: Active Voice Hardware Product shipment will be
made F.O.B. ACTIVE VOICE plant, with risk of loss or
damage passing to NEC on delivery to common carrier at
F.O.B. point. Shipments will be made at a "declared
value" equal to the invoice price of the Active Voice
Hardware Product shipped. In the absence of specific
routing instructions, Active Voice may select the common
carrier and method of shipment.
(d) ACCEPTANCE: NEC, its Distributors or its End User
customers shall inspect the Active Voice Hardware
Products within a reasonable time upon receipt from
Active Voice, and shall: (i) within thirty (30) calendar
days of such receipt give written notice to Active Voice
of any claim for shortages; and (ii) within sixty (60)
calendar days of such delivery give written notice to
Active Voice of a claim for shortages or a claim that the
Active Voice Hardware Products, do not substantially
conform to the applicable Specifications for such Active
Voice Hardware Products, NEC shall ship, at NEC's cost,
any non-conforming product to Active Voice. As NEC's sole
and exclusive remedy for non-acceptance, Active
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<PAGE>
Voice shall promptly replace any nonconforming Active Voice
Hardware and shall pay the shipping cost to NEC for the
replacement product.
2.3 THIRD PARTY HARDWARE: With respect to any Third Party Hardware, the
Parties shall determine terms for ordering, shipment and other
terms on a case-by-case basis in the SPA for such Third Party
Hardware. Unless otherwise agreed to in a SPA, NEC shall pursue its
remedies for product defects, nonconformity, warranties and other
bases for liability directly and exclusively against the Third
Party Hardware supplier and not Active Voice.
2.4 NEW PRODUCTS
(a) NEW PRODUCTS: If Active Voice, in its sole discretion,
creates any New Product, Active Voice shall offer such New
Product to NEC on MFB Terms.
2.5 PRODUCT CONTROL: Active Voice may modify the Licensed Software,
Third Party Software, Active Voice Hardware and/or Third Party
Hardware under a SPA in its sole discretion. If NEC does not accept
such modification the Parties shall terminate the SPA for that
product and such termination shall be NEC's sole and exclusive
remedy with respect to such SPA. A modified product shall supersede
the prior version of that product and the prior version shall not be
deemed discontinued if the modified version utilizes a significant
portion of the common core technology utilized in such prior
version.
2.6 PRODUCT DISCONTINUANCE:
(a) DEFINITION: Product Discontinuance for the Licensed Software
shall be evidenced by proof that any of the following
conditions has occurred: (i) Active Voice has terminated or
reassigned the employment of substantially all of the
personnel involved with the product alleged to be discontinued
and such termination or reassignment has resulted in Active
Voice's inability to provide product support; (ii) Active
Voice refuses to respond to support requests in violation of
the support agreement; and (iii) Active Voice has terminated
its continuing ability to manufacture and ship the product
alleged to be discontinued, as evidenced by termination
without plans for replacement of the key vendor relationships
necessary to supply such product.
(i) EXCEPTIONS: Notwithstanding anything to the contrary in
2.6(a) above, Product Discontinuance shall not be deemed
to have occurred if:
(1) Active Voice ceases to make, ship, provide or
license any product for any reason that relates to
any third party product or supplier of software or
hardware included in the product, (e.g., availability,
quality, reliability, support, price, liability),
provided that Active Voice shall use its Best Efforts
to find a comparable replacement for such third party
product or supplier; or
(2) Active Voice has replaced such product with another
product that uses a significant portion of common
core technology belonging to the product alleged to
be discontinued.
(b) CONSEQUENCE: If, under Sections 2.6(a) above, Product
Discontinuance has occurred within three (3) years of the
Effective Date of the SPA for that product, then the following
provisions shall apply:
(i) LICENSED SOFTWARE: Active Voice shall refund any NRE
paid by NEC to Active Voice singularly attributable to
the discontinued item of Licensed Software.
(ii) ACTIVE VOICE HARDWARE: Active Voice shall refund any NRE
paid by NEC to Active Voice for hardware qualification
costs or engineering costs singularly attributable to
the discontinued item of Active Voice Hardware.
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(c) NOTICE: Even if Active Voice's cessation of making, shipping,
providing or licensing a product does not constitute Product
Discontinuance under this Section, Active Voice shall use its
Best Efforts to provide NEC with the following advance written
notice:
(i) Licensed Software: Advance notice of one hundred and
twenty (120) days.
(ii) Active Voice Hardware, Third Party Software and Third
Party Hardware: Notice upon Active Voice's receipt of
notification from any third party supplier that the
product will no longer be provided, or sixty (60) days,
if possible.
2.7 THIRD PARTY SOFTWARE AND THIRD PARTY HARDWARE:
(a) SCOPE AND BASIC TERMS: Each SPA shall include a list of Third
Party Software and Third Party Hardware, if any, that Active
Voice anticipates will be shipped with the Licensed Software
or Active Voice Hardware. Active Voice may change such list in
its sole discretion at any time, provided that such change
does not diminish the functionality, reliability, or operation
of such product, except where no comparable replacement
product is available and Active Voice has used its Best
Efforts to find such comparable replacement product.
(a) LICENSING OF THIRD PARTY SOFTWARE AND THIRD PARTY HARDWARE:
According to the Parties' mutual agreement, Third Party
Software and Third Party Hardware shall be either sublicensed
through Active Voice to NEC under this Agreement or licensed
to NEC directly by the Third Party Software or Third Party
Hardware supplier in accordance with the Third Party
Documentation. If any Third Party Software or Third Party
Hardware supplier desires to conduct a compliance audit, NEC
shall cooperate with Active Voice in connection therewith.
(b) PRICING FOR THIRD PARTY SOFTWARE AND THIRD PARTY HARDWARE:
Pricing, if any, for Third Party Software and Third Party
Hardware shall be in accordance with the schedule or price
list for a SPA, or in accordance with the licensing agreement
directly between NEC and the Third Party Software or Third
Party Hardware supplier.
2.8 DEVELOPMENT OF MODIFIED SOFTWARE: If NEC desires development work
in connection with the Licensed Software, the Parties shall discuss
the goals and Specifications of such work and attempt to negotiate
in good faith mutually agreeable terms and conditions for the
development of any Modified Software. If the Parties reach
agreement on terms for the development, such terms shall be set
forth in a Statement of Work, included in or as an attachment to
the applicable SPA. Any such Statement of Work shall be governed by
this Agreement and the development provisions set forth in Exhibit
C, attached hereto. In addition, any Statement of Work shall
contain, at minimum, the following provisions: Specifications,
development responsibilities, NRE, payment schedule, license scope,
ownership and an estimated schedule for delivery.
3. LICENSES: The following license provisions are set forth in an elective
format where each SPA must designate which license grant(s) shall apply
to the particular product covered by such SPA. For example, a SPA for a
software product for which NEC shall have rights to distribute,
reproduce, and private label, shall designate in the license section of
that SPA that "Active Voice grants to NEC the license contained in
Section 3.1.c of the Agreement, under the terms set forth therein."
3.1 LICENSED SOFTWARE: During the Term and subject to the terms and
conditions of this Agreement, Active Voice, under its Intellectual
Property Rights, grants to NEC a limited,
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worldwide, nonexclusive, nontransferable (except in an allowed
assignment), irrevocable (except for material breach), non-sublicensable
(except for sublicense of the distribution right to Distributors and
archival reproduction to End Users), royalty-bearing license with the
following terms:
(a) DISTRIBUTION: To use, install, publicly display, publicly perform,
sell, market, import and distribute the Final Acceptance versions
of the Licensed Software, in Object Code format only.
(b) DISTRIBUTION AND REPRODUCTION: To use, install, copy, reproduce,
publicly display, publicly perform, sell, market, import and
distribute the Final Acceptance versions of the Licensed Software,
in Object Code format only.
(c) DISTRIBUTION, REPRODUCTION AND LOCALIZATION: To use, install, copy,
reproduce, publicly display, publicly perform, sell, market, import
and distribute the Final Acceptance versions of the Licensed
Software, in Object Code format only. In addition, NEC may create
Derivative Works from the Licensed Software solely for the purposes of
Localizing the Licensed Software for a particular market.
(i) OWNERSHIP AND LICENSE BACK OF DERIVATIVE WORKS: Upon NEC's
independent creation of any Derivative Work from the Licensed
Software, NEC shall own such modification or Derivative Work
subject to:
(1) Active Voice's underlying rights in the Licensed Software;
(2) Payment to Active Voice of any royalties therefor in
accordance with the SPA for the underlying work.
(ii) NON-BLOCKING OF ACTIVE VOICE DEVELOPMENT: Notwithstanding the
Derivative Works license granted to NEC by Active Voice in this
Section 3.1 and the Ownership rights in Section 5.5 below,
Active Voice shall not be blocked from undertaking development
similar to that of the NEC-created Derivative Works. Provided
that Active Voice and/or its licensees have not substantially
copied any part of the NEC-created Derivative Works, NEC
covenants not to sue Active Voice or its licensees for any
similarity resulting from similar development paths. If Active
Voice desires to use or copy from the NEC-created Derivative
Works, the Parties shall discuss the terms for such use.
(d) PRIVATE LABEL BRANDING AND PACKAGING: In connection with exercising
its other rights granted in this Section 3.1(d), NEC may privately
brand, label and package the Licensed Software with NEC's trademarks,
including, but not limited to NEC's house mark and any product line
or specific product mark. If NEC exercises such rights, use of such
trademarks shall be exclusive to NEC without any right granted to
Active Voice. To the extent NEC desires to use any Active Voice mark
apart from the marks appearing within the running program of the
Licensed Software itself, NEC and Active Voice shall discuss and
negotiate mutually agreeable, non-royalty bearing terms for such
trademark license.
3.2 END USER DOCUMENTATION LICENSE: During the Term and subject to the terms
and conditions of the Agreement, Active Voice, under its Intellectual
Property Rights, grants to NEC a limited, worldwide, nonexclusive,
nontransferable (except in an allowed assignment), irrevocable (except
for material breach), royalty-free license with the following terms:
(a) DISTRIBUTION AND REPRODUCTION: To copy, reproduce, publicly display,
publicly perform, sell, market, import and distribute the End User
Documentation solely in connection with the Licensed Software.
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(b) DISTRIBUTION, REPRODUCTION AND LOCALIZATION: To copy, reproduce,
publicly display, publicly perform, sell, market, import and
distribute the End User Documentation solely in connection with the
Licensed Software. In addition, NEC may make modifications to and
create Derivative Works from the End User Documentation solely for
the purposes of Localizing the End User Documentation for a
particular market.
(i) OWNERSHIP OF DERIVATIVE WORKS: Upon NEC's independent creation
of any Derivative Work from the End User Documentation,
NEC shall own such Derivative Works subject to Active Voice's
underlying rights in the End User Documentation.
(ii) NON-BLOCKING OF ACTIVE VOICE DEVELOPMENT: Notwithstanding the
Derivative Works license granted to NEC by Active Voice in this
Section 3.2 and the Ownership rights in Section 5.5 below,
Active Voice shall not be blocked from undertaking development
similar to that of the NEC-created Derivative Works. Provided
that Active Voice and/or its licensees have not substantially
copied any part of the NEC-created Derivative Works, NEC
covenants not to sue Active Voice or its licensees for any
similarity resulting from similar development paths. If Active
Voice desires to use or copy from the NEC-created Derivative
Works, the Parties shall discuss the terms for such use.
(c) PRIVATE LABEL BRANDING AND PACKAGING: In connection with exercising
its other rights granted in this Section, NEC may privately brand,
label and package the End User Documentation with NEC's trademarks,
including, but not limited to NEC's house mark and any product line
or specific product mark. If NEC exercises such rights, use of such
trademarks shall be exclusive to NEC without any right granted to
Active Voice. To the extent NEC desires to use any Active Voice mark
apart from the marks already appearing in the End User
Documentation, i.e., as part of a compound mark used as a brand name
or product name, NEC and Active Voice shall discuss and negotiate
mutually agreeable non-royalty bearing terms for such trademark
license with adequate usage guidelines. In creating and
distributing such privately-labeled Derivative Works, NEC shall
preserve at least one Active Voice (and Active Voice vendor, if
any) copyright notice and trademark legend in the modified End User
Documentation.
3.3 TRADEMARK LICENSE GRANT: During the Term and subject to the terms and
conditions of this Agreement, Active Voice hereby grants to NEC a
worldwide, non-exclusive, nontransferable, irrevocable (except for
material breach), royalty-free license, without the right to sub-license,
to use the Active Voice trademarks in or on advertising, marketing
materials, and/or packaging for the Licensed Software and in the End User
Documentation. Active Voice shall have a right of prior written approval
over the first instantiation of each use by NEC of the Active Voice
trademarks in any context other than as such marks already appear on or
within the Licensed Software or End User Documentation. NEC also agrees
to use the Active Voice trademarks only as adjectives and to include -TM-
and -Registered Trademark- legends where appropriate. Active Voice, in
its sole discretion, may issue and amend guidelines for trademark usage.
NEC agrees to comply with any such guidelines.
4. LICENSE RESTRICTIONS: The following license restrictions are not elective
and shall apply to the Licensed Software under each SPA unless
specifically stated otherwise therein.
4.1 RESERVATION OF RIGHTS: All rights not expressly granted herein are
reserved to the owner, and no other licenses are granted herein by
implication, estoppel or otherwise.
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4.2 SINGLE COPY RESTRICTION: When NEC sublicenses the distribution
right to the Object Code of the Licensed Software, NEC shall not
include more than one copy each of the Licensed Software with each
NEC Product sold or otherwise distributed by NEC or NEC's
Distributors. Notwithstanding the above, Licensed Software that is
sold or otherwise distributed as a pre-loaded image on an NEC
Product may also include one back-up copy of such Licensed Software
on a CD-ROM, and together shall constitute one Royalty Unit.
4.3 NO REVERSE ENGINEERING: NEC shall not reverse engineer, decompile
or disassemble the Licensed Software provided to NEC under this
Agreement.
4.4 PROPRIETARY MARKINGS: NEC agrees to reproduce and to not alter,
obscure, or remove any Active Voice (or Active Voice vendor)
proprietary notice included in or on the Licensed Software and/or
End User Documentation. Notwithstanding the foregoing, however, in
connection with any modifications NEC might be permitted to make to
the Licensed Software, NEC may reduce the number of Active Voice or
Active Voice vendor's proprietary markings so that such markings
appear only in the opening or splash screen of the NEC Product and
in the "about box" of such NEC Product.
4.5 NONCOMPLIANCE: NEC agrees to promptly notify Active Voice if the
Licensed Software is used in any manner except as noted above. The
restrictions of this Section 4 shall be subject to the audit right
in Section 7.5 herein if Active Voice suspects noncompliance by NEC
with this provision. Additionally, the Parties agree that Section 4
of this Agreement was an essential, material term in establishing
the consideration under this Agreement and that upon any breach
hereof, which if uncured in accordance with Section 9.2(a) of this
Agreement, Active Voice may terminate this Agreement.
5. OWNERSHIP:
5.1 OWNERSHIP OF LICENSED SOFTWARE AND DERIVATIVE WORKS THEREFROM: As
between NEC and Active Voice, unless under Section 3.1.c.i. or
otherwise provided, NEC acknowledges that Active Voice and/or
Active Voice's vendors have sole and exclusive right, title and
interest in and to all of the Intellectual Property Rights in the
Licensed Software and any Derivative Works therefrom created by
Active Voice or the Parties jointly.
5.2 OWNERSHIP OF ACTIVE VOICE HARDWARE AND DERIVATIVE WORKS THEREFROM:
As between NEC and Active Voice, except as provided under Section
3.1.c.i., NEC acknowledges that Active Voice and/or Active Voice's
vendors have sole and exclusive right, title and interest in, and
to all of the Intellectual Property Rights in the Active Voice
Hardware and Derivative Works therefrom created by Active Voice or
the Parties jointly.
5.3 OWNERSHIP OF END USER DOCUMENTATION AND DERIVATIVE WORKS THEREFROM:
As between NEC and Active Voice, except as provided under Section
3.1.c.i., NEC acknowledges that Active Voice and/or Active Voice's
vendors have sole and exclusive right, title and interest in and to
all of the Intellectual Property Rights in the End User
Documentation and any Derivative Works therefrom created by Active
Voice or the Parties jointly.
5.4 OWNERSHIP OF TECHNICAL DOCUMENTATION AND DERIVATIVE WORKS
THEREFROM: As between NEC and Active Voice, NEC acknowledges that
Active Voice and/or Active Voice's vendors have sole and exclusive
right, title and interest in and to all of the Intellectual
Property Rights in the Technical Documentation and any Derivative
Works therefrom created by Active Voice or the Parties jointly.
5.5 OWNERSHIP OF INDEPENDENT NEC DEVELOPMENT: As between NEC and Active
Voice, Active Voice acknowledges that NEC and/or NEC's vendors have
sole and exclusive right, title and interest in and to all of the
Intellectual Property Rights in any independent
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development to the NEC Products done by NEC, subject to any
ownership rights of Active Voice in and to any underlying works
thereto. For purposes of this Agreement, "independent development"
shall mean NEC development done by NEC and not by the Parties
jointly.
5.6 OWNERSHIP OF NEC TRADE SECRETS: As between NEC and Active Voice,
Active Voice acknowledges that NEC has sole and exclusive right,
title and interest in and to the trade secrets that NEC discloses
to Active Voice and documents in a trade secret transmittal form
pursuant to the Notice provisions in Section 14.5 below. Such
transmittal form shall describe the general nature of the trade
secret being disclosed and protected. In addition, the Parties
acknowledge the Trade Secret Transmittal Form covering NEC's
proprietary AAInfo, attached hereto as Exhibit I.
5.7 OWNERSHIP OF TRADEMARKS: As between the Parties, each Party
acknowledges the other Party's sole and exclusive right, title and
interest in and to all of the Intellectual Property Rights in such
other Party's trademarks. At no time during or after the term of
this Agreement shall either Party challenge or assist others to
challenge the other Party's trademarks, or the registration thereof
in the attempt to register any trademarks, marks or similar rights
for marks the same as or confusingly similar to those of the other
Party.
6. PRICING AND COMPENSATION:
6.1 PRICE FOR LICENSED SOFTWARE: NEC shall pay to Active Voice the
royalties per Royalty Unit and/or Use for the Licensed Software as
specified in the applicable SPA.
6.2 PRICE FOR HARDWARE PRODUCTS: NEC shall pay to Active Voice the
price per unit for the Hardware Products as specified in the
applicable SPA. Except as otherwise provided in any such SPA,
Active Voice may increase such pricing upon sixty (60) days notice
to NEC. However, to the extent that NEC has provided a binding
quotation to a distributor prior to or within five (5) days of Active
Voice's notice of a price change, Active Voice shall honor its prior
pricing for such product provided Active Voice receives the order
pursuant to the quotation together with a copy of the dated and
numbered quotation within one hundred (100) days of the date of
Active Voice's notice of the price change. Upon request, NEC shall
verify the information on the quote.
(a) MINIMUMS: If, during the Term of this Agreement, NEC desires
to commit to a minimum royalty amount and/or minimum quantity,
Active Voice shall consider and negotiate in good faith price
and other terms consistent with such commitments.
(b) PRICE REDUCTIONS: If Active Voice reduces its standard pricing
for the Hardware Products, it will notify NEC immediately and
shall apply such price reduction to all pending, unshipped
purchase orders.
6.3 MFB TERMS: NEC shall receive MFB Terms from Active Voice on all
Licensed Software and Hardware Products subject to this Agreement.
6.4 ROYALTY AND FEE EXEMPT COPIES AND/OR USES: No royalties or fees
will be payable for the number of copies of the Licensed Software,
as shall be agreed in a SPA, which are: (i) used internally by NEC
for customer support; (ii) used for evaluation, demonstration or
marketing purposes to promote the sale of royalty-bearing copies or
uses of the Licensed Software (provided NEC does not receive any
revenue or revenue equivalent therefor); or (iii) used by NEC
internally for demonstration or training. In addition, no royalties
or fees will be payable for copies of the Licensed Software which
are distributed merely as bug fixes in Maintenance Releases at the
direction of Active Voice to End Users licensed for the previous
release of the Licensed Software.
In addition, Active Voice acknowledges that no royalties shall be
due in connection with any reinstallation of the Licensed Software
into a new hardware configuration, provided
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that: (i) the reinstalled system replaces the original system due
to hardware defect; (ii) the reinstalled system is used by the same
customer at the same site; and, (iii) there would otherwise be no
New Release charge for the Licensed Software that is reinstalled.
6.5 TAX AND WITHHOLDING: NEC is responsible for all taxes, duties,
tariffs and withholdings in any jurisdiction imposed in connection
with transactions between Active Voice and NEC under this Agreement
other than taxes based on Active Voice's income in the United
States. In the event that such taxes, duties, tariffs or
withholdings are legally imposed initially on Active Voice or
Active Voice is later assessed by any taxing authority, then NEC
shall promptly reimburse Active Voice for the same. This clause
shall survive the termination of the Agreement.
6.6 PRICING FOR NEW RELEASES: Pricing for New Releases shall be
according to the mutual agreement of the Parties. Nothing in this
Section shall restrain or restrict Active Voice in any way from
pricing its products in accordance with its sole discretion.
6.7 STATEMENT OF WORK AND ENGINEERING COMPENSATION: Provided that
Active Voice meets its development obligations to NEC under Exhibit
C, attached hereto and the particular Statement of Work and/or SPA
under which NRE is incurred, NEC shall compensate Active Voice in
accordance with the provisions of such Statement of Work and/or SPA.
6.8 CONSULTING AND ENGINEERING WORK: Prices for consulting and
engineering work provided by Active Voice which are not covered in
an SPA shall be negotiated in good faith by the parties.
7. REPORTS AND PAYMENTS:
7.1 REPORTS FOR LICENSED SOFTWARE: Within ten (10) days following the
end of each calendar month, commencing with the month during which
the first sale or shipment of Royalty Units and/or Uses of Licensed
Software by NEC or its Affiliates occurs, NEC or its Affiliates
shall furnish to Active Voice a written statement in English, in a
form reasonably acceptable to Active Voice and signed by an
authorized employee or agent of NEC or its Affiliates, showing the
number of Royalty Units and/or Uses of Licensed Software made,
distributed, licensed and/or sold by NEC or its Affiliates to
Distributors and End Users during such calendar month. If in any
quarter, no reportable activity has occurred, that fact shall be
shown on such report. The reports shall specify the applicable NEC
Product including the Licensed Software, the SPA under which the
Licensed Software was distributed, and the NEC Affiliate
responsible for such distribution, if that NEC Affiliate is not
reporting activity directly.
7.2 INVOICE AND PAYMENT PROVISIONS:
(a) PAYMENT BASIS: The following invoice and payment provisions
are alternative depending on the type of product, e.g.,
Licensed Software, Hardware Product, and licensing
arrangement, e.g., gold master, production key, system key, as
set forth in a SPA. Each SPA shall specify which invoice and
payment provisions shall apply:
(i) LICENSED SOFTWARE: GOLD MASTER: Upon receipt of NEC's
Report, described in Section 7.1 above, Active Voice
shall issue an invoice to NEC in a form acceptable to
NEC. Upon receipt of Active Voice's invoice, and within
sixty (60) days following the end of each calendar
quarter (March 31, June 30, September 30 and December
31), commencing with the calendar quarter during which
the first sale or shipment of Royalty Units and/or Uses
of Licensed Software by NEC occurs, NEC shall,
irrespective of its own business and accounting
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methods, pay in United States Dollars to Active Voice the
royalties payable for such quarter as shown in the Report
and invoice described above for the Licensed Software.
(ii) LICENSED SOFTWARE: PRODUCTION AND SYSTEM KEYS: HARDWARE
PRODUCTS: Upon receipt of NEC's purchase order for
authorization to load or enable the Licensed Software via
any production or system keys, or to ship Hardware
Products, Active Voice shall issue an invoice to NEC,
which NEC shall pay within sixty (60) days from receipt.
(b) PAYMENT INSTRUCTIONS: Royalties, invoice payments and all
other compensation due to Active Voice pursuant hereto will be
paid by check tendered or wire transfer at the following
address:
REMITTANCE ADDRESS WIRE TRANSFER ACCOUNT
Active Voice Corporation Wells Fargo Bank N.A.
2901 Third Ave. San Francisco, CA 94163
Seattle, WA 98121 ABA#121000246
Attn: Accounts Payable FBO Active Voice Corporation
Account #4159633163
or to such other payment addressees as Active Voice shall
hereafter designate in a notice given in accordance with
Section 14.5.
7.3 FORECASTS: Within sixty (60) days following the end of each
calendar quarter (March 31, June 30, September 30 and December 31),
commencing with the calendar quarter during which the first sale or
shipment of Royalty Units and/or Uses of Licensed Software by NEC
or its Affiliates occurs, or purchase orders to Active Voice occur,
NEC shall provide Active Voice with its best forecast or expected
sales or purchase orders in the next quarter.
7.4 RECORDS: For so long as NEC and its Affiliates may be obligated to
pay any royalties or make any payments under this Agreement, and
for a period of three (3) years thereafter, NEC and its Affiliates
agree to keep and maintain complete and accurate records for the
current year and the preceding (3) three years of all data
reasonably required for the verification of: (a) the amounts to be
paid under this Agreement; (b) the information to be reported
under this Agreement; and (c) the license terms or other
restrictions to be complied with under this Agreement.
Notwithstanding the foregoing, NEC and its Affiliates shall not be
obligated to maintain such records for more than one year after
termination or expiration of this Agreement.
7.5 AUDIT RIGHTS: During the term of required records set forth in
Section 7.4 above, Active Voice may conduct an audit of NEC's or
its Affiliate's records and a written certification by a mutually
acceptable independent Certified Public Accountant that the
reports, payments and records are correct or that NEC is performing
in accordance with this Agreement. Active Voice shall provide NEC
with at least thirty (30) calendar days notice of such audit. In
the event the Parties cannot in good faith agree as to an auditor
within such ten (10) day notice period, Active Voice may select any
of the top five (5) CPA firms to conduct the audit. Such auditor
will report to Active Voice only whether the amounts due or
payable to Active Voice pursuant to this Agreement were correct,
any amount that is due and payable to Active Voice, and information
related to compliance or noncompliance with this Agreement. Such
auditor will hold such information in confidence and will not
disclose such information to any other person or entity, other than
Active Voice, without the prior written consent of NEC. Audits will
occur during normal business hours and no more frequently than once
per calendar year, unless Active Voice can present a reasonable
basis for its belief that an audit in a lesser time period is
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needed. The cost of such audits will be borne by Active Voice
unless a payment discrepancy unfavorable to Active Voice greater
than or equal to five percent (5%) of the amounts owed for any
reporting period covered by the audit is discovered, in which case
NEC shall pay the costs of the audit as well as any payment
deficiency and interest thereon. A copy of the audit shall be
submitted to NEC.
8. NECAM APPOINTMENT AS RELATIONSHIP MANAGER:
The Parties hereby agree that NECAM shall be the relationship
manager for all NEC Affiliates that become direct Parties to this
Agreement with respect to this Agreement and any SPAs hereunder.
The Enrolled Affiliates hereby authorize NECAM to act as their
general agent with general authority, including the ability to
enter into contracts, release claims and make legally binding
commitments on behalf of such Enrolled Affiliates in all matters
arising from or connection with this Agreement. Active Voice shall
be entitled to rely on communications from NECAM on behalf of such
Enrolled Affiliates as though such communications came directly
from such Enrolled Affiliates. Notwithstanding anything to the
contrary herein, Active Voice and any Enrolled Affiliate may
communicate and deal directly with each other in full contractual
privity in connection with any SPAs, Statements of Work,
development activities, training, support and technical
specifications relating to such NEC Affiliate. The relationship
manager shall be provided copies of all of the aforementioned
agreements. In addition, nothing in this Agreement prevents Active
Voice, its Affiliates and/or its Distributors from entering into
any agreements with NEC Affiliates or Distributors, including in
connection with the Licensed Software, Third Party Software, Active
Voice Hardware and Third Party Hardware.
9. TERM AND TERMINATION:
9.1 TERM: The initial term of this Agreement shall be five (5) years
beginning on the Effective Date. Thereafter, the Agreement shall
automatically renew at the end of such initial term on the
anniversary date of the Effective Date for additional one (1) year
renewal terms, unless either Party provides written notice to the
contrary at least ninety (90) calendar days before any renewal date.
9.2 TERMINATION FOR CAUSE:
(a) ACTIVE VOICE TERMINATION FOR CAUSE: Active Voice may
terminate, with respect to NEC or any of its Affiliates, this
Agreement if NEC fails to pay for Licensed Software or
Hardware Products in accordance with the terms of this
Agreement, unless NEC has a good faith basis to dispute such
payment obligation, or if NEC fails to comply with any
material term or condition of this Agreement, provided Active
Voice has given NEC thirty (30) calendar days written notice
of such failure to pay or comply and NEC has not remedied such
failure within the thirty (30) day period. However, if the
nature of such breach does not permit remediation within
thirty (30) calendar days despite NEC's good faith efforts,
the breach cure period shall be extended for such reasonable
time as the Parties may agree. Additionally, Active Voice may
terminate this Agreement immediately if NEC: (a) files or has
filed against it a petition in bankruptcy, (b) has a receiver
appointed to handle its assets or affairs, (c) makes or
attempts to make an assignment for the benefit of creditors,
or (d) violates the confidentiality provisions of this
Agreement.
(b) NEC TERMINATION FOR CAUSE: NEC may terminate this Agreement if
Active Voice fails to comply with any material term or
condition of this Agreement provided NEC has given Active
Voice thirty (30) days written notice of such failure and
Active Voice has not remedied such failure within the thirty
(30) day period. However, if the nature of such breach does
not permit remediation within thirty
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(30) calendar days despite Active Voice's good faith efforts,
the breach cure period shall be extended for such reasonable
time as the Parties may agree. Additionally, NEC may terminate
this Agreement immediately if Active Voice: (a) files or has
filed against it a petition in bankruptcy, (b) has a receiver
appointed to handle its assets or affairs, (c) makes or
attempts to make an assignment for the benefit of creditors,
or (d) violates the confidentiality provisions of this
Agreement.
(c) CUMULATIVE REMEDIES: Each Party's rights to terminate are in
addition to any other rights that Party may have, subject to
the limitations on liability imposed in this Agreement.
9.3 EFFECT OF TERMINATION OR EXPIRATION: Upon the termination or
expiration of this Agreement, all licenses granted hereunder shall
terminate immediately and without any requirement of further
notice, except that: (a) all completed and delivered sales by NEC
and its Distributors to its End Users and the validly granted
sublicenses to the Licensed Software thereunder, shall survive any
termination or expiration of this Agreement, (b) NEC and its
Affiliates and Distributors may distribute any product in its or
its Affiliates or Distributor's inventory, and (c) all licenses
back to Active Voice shall survive, provided that termination was
not due to an unremediated Active Voice material breach. Upon
termination or expiration of this Agreement, each Party shall
return or certify it has destroyed all copies of material and
Confidential Information owned by the other.
10. CONFIDENTIALITY:
10.1 CONFIDENTIAL INFORMATION: For purposes of this Agreement, the term
"Confidential Information" shall mean all non-public information
that a Party designates as being confidential, or which, under the
circumstance of disclosure ought to be treated as confidential.
Confidential Information includes, without limitation, information
that relates to research, development, trade secrets, know-how,
product development plans, inventions, technical data, software
programming, concepts, designs, procedures, manufacture,
purchasing, accounting, engineering, marketing, merchandising and
selling, business plans or strategies, customers, and information
entrusted to a Party or its principal officers and employees by
third parties. Confidential Information shall not include
information that was known to a Party prior to disclosure by the
other Party, information that was independently developed by the
other Party by an employee with no exposure to the Confidential
Information, information that was independently discovered by the
other Party by an employee with no exposure to the Confidential
Information, or information that becomes publicly available through
no fault of the recipient, or is approved for disclosure by the
owner of the Confidential Information, in writing, prior to its
disclosure. Both parties shall provide the same type and degree of
care to prevent disclosure or unauthorized use of the other party's
Confidential Information as they would provide to protect their own
Confidential Information. As a minimum requirement, NEC and Active
Voice shall retain each other's Confidential Information in one on
more secure places with access limited only to their respective
representatives, officers, employees or agents who have a "need to
know" such Confidential Information.
10.2 OBLIGATION: Each Party agrees that at all times during the Term of
this Agreement, and for a period of three (3) years thereafter, it
shall hold in strictest confidence, and will not use the
Confidential Information, except as necessary to perform its
obligations under the Agreement. Each Party shall disclose
Confidential Information only to its employees, Affiliates and
independent contractors who have a need to know such information
for purposes of performance under this Agreement and who have
executed confidentiality agreements with such Party sufficient to
prohibit unauthorized use and disclosure of the Confidential
Information disclosed. A Party shall not disclose the Confidential
Information
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of the other Party to any third Party without the prior written
consent of the disclosing Party.
10.3 CONFIDENTIALITY OF AGREEMENT: Each Party agrees that the terms,
conditions and contents of this Agreement shall be treated
confidentially and that no reference thereto shall be made in any
form without the prior written consent of the other Party, except
to accountants, banks, financing sources, lawyers and related
parties or in connection with the enforcement of this Agreement.
The Parties shall mutually agree upon any public announcements of
this Agreement. Both Parties shall have the right of written
pre-approval with respect to any and all press releases referring
to the subject matter of this Agreement.
10.4 EXCEPTIONS: The confidentiality provisions of this Section 10 shall
apply to prohibit disclosure of the Confidential Information
except (i) as required by applicable disclosure laws; or (ii) in
connection with a court order requiring disclosure, in which case
the Party under order must provide immediate notice and cooperate
in any attempt to quash such order.
11. WARRANTIES:
11.1 LICENSED SOFTWARE:
(a) LIMITED MEDIA AND PERFORMANCE WARRANTY: Active Voice represents
and warrants that: (i) upon initial delivery by Active Voice
of the Final Acceptance version of the Licensed Software and
for fourteen (14) months thereafter, the media on which the
Licensed Software is furnished, exclusive of Third Party
Software and Third Party Hardware, will be free from defects
in materials and workmanship, and (ii) upon shipment of the
Licensed Software to the End User and for fourteen (14) months
thereafter, the Licensed Software will perform substantially
in accordance with the Specifications for the Licensed
Software when used as permitted under this Agreement and in
accordance with the End User Documentation, provided that the
NEC-developed software, NEC Products, Third Party Software and
Third Party Hardware operate substantially in accordance
with their applicable specifications. Active Voice does not
warrant that the operation of the Licensed Software will be
interruption or error free, or will be free from bugs,
defects, viruses, and/or security issues.
(b) NECESSARY RIGHTS: As of the Effective Date, Active Voice
represents and warrants that it has no actual or constructive
knowledge of any claim of infringement by any third party in
any jurisdiction with respect to the Licensed Software.
(c) YEAR 2000
(i) LICENSED SOFTWARE: Active Voice represents and warrants
that the Licensed Software is Year 2000 Ready.
(ii) THIRD PARTY SOFTWARE OR THIRD PARTY HARDWARE: Active
Voice represents and warrants that it shall use its Best
Efforts to investigate the Third Party Software and Third
Party Hardware to determine whether the Third Party
Software and Third Party Hardware are Year 2000 Ready.
Active Voice makes no other representation or warranty
regarding the Year 2000 or any date data sensitivity in
connection with the Third Party Software, Third Party
Hardware or the data interface or interoperability of
such Third Party Software and Third Party Hardware with
respect to the Licensed Software. Active Voice agrees to
provide any product literature or non-confidential
technical information in Active Voice's possession to
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NEC regarding the Year 2000 Readiness of such Third Party
Software and Third Party Hardware.
(d) DISCLAIMER: EXCEPT AS SPECIFICALLY SET FORTH HEREIN, THE
LICENSED SOFTWARE IS AND SHALL BE PROVIDED STRICTLY ON AN "AS
IS" BASIS. TO THE MAXIMUM EXTENT ALLOWABLE BY LAW, ACTIVE
VOICE HEREBY SPECIFICALLY DISCLAIMS ALL WARRANTIES, WHETHER
EXPRESS, IMPLIED, OR STATUTORY, INCLUDING WITHOUT LIMITATION
ANY: (I) WARRANTY OF MERCHANTABILITY; (II) WARRANTY OF FITNESS
FOR A PARTICULAR PURPOSE; (III) WARRANTY ARISING FROM COURSE
OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; AND/OR
(IV) WARRANTY OF TITLE OR NONINFRINGEMENT.
(e) TERMINATION OF WARRANTIES: With respect to the Licensed
Software, all warranties in this Section 11 shall terminate
upon the earlier occurring of the following events: (i)
fourteen (14) months after shipment of the Licensed Software
to the End User, (ii) twelve (12) months after expiration or
termination of the Agreement, or, (iii) upon any NEC
modification to the Licensed Software if such modification
might affect the warranties herein.
(f) EXCLUSIVE REMEDY FOR LICENSED SOFTWARE: If any item of the
Licensed Software fails to comply with the warranties as set
forth above, Active Voice will, at its own expense and as its
sole obligation and NEC's sole and exclusive remedy for any
breach of this warranty, use its Best Efforts to correct the
noncompliance (e.g., by furnishing a modification or
replacement), provided that Active Voice is able to reproduce
the noncompliance on the computer and telecommunication system
for which the item was designed. If after the expenditure of
such Best Efforts, Active Voice is unable to correct the
noncompliance, the Parties shall terminate the SPA for that
Licensed Software and Active Voice shall refund NEC the
compensation paid by NEC for any defective units of the
Licensed Software, if any, in which event such refund shall be
in full satisfaction of all claims relating to such
noncompliance.
11.2 ACTIVE VOICE HARDWARE:
(a) LIMITED PRODUCT AND PERFORMANCE WARRANTY: Active Voice
represents and warrants that upon initial delivery by Active
Voice and for fourteen (14) months thereafter: (i) the Active
Voice Hardware, exclusive of Third Party Hardware and Third
Party Software, will be free from defects in materials and
workmanship, and (ii) the Active Voice Hardware will perform
substantially in accordance with the Specifications for the
Active Voice Hardware, when used as permitted under this
Agreement and in accordance with the End User Documentation,
provided that the NEC-developed software, NEC Products, Third
Party Software and Third Party Hardware operate substantially
in accordance with their applicable specifications. Active
Voice does not warrant that the operation of the Active Voice
Hardware will be interruption or error free, or will be free
from bugs, defects, viruses, and/or security issues.
(b) NECESSARY RIGHTS: As of the Effective Date, Active Voice
represents and warrants that it has no actual or constructive
knowledge of any claim of infringement by any third party in
any jurisdiction with respect to the Active Voice Hardware.
(c) DISCLAIMER: EXCEPT AS SPECIFICALLY SET FORTH HEREIN, THE
ACTIVE VOICE HARDWARE IS AND SHALL BE PROVIDED STRICTLY ON AN
"AS IS" BASIS. TO THE MAXIMUM EXTENT ALLOWABLE BY LAW, ACTIVE
VOICE HEREBY SPECIFICALLY DISCLAIMS ALL WARRANTIES, WHETHER
EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION
ANY: (I) WARRANTY OF MERCHANTABILITY; (II) WARRANTY OF FITNESS
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FOR A PARTICULAR PURPOSE; (III) WARRANTY ARISING FROM
COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF
TRADE; AND/OR (IV) WARRANTY OF TITLE OR NONINFRINGEMENT.
(d) TERMINATION OF WARRANTIES: With respect to the Active
Voice Hardware, all warranties in this Section 11 shall
terminate upon the earlier occurring of the following
events: (i) fourteen (14) months after delivery by Active
Voice of the specific unit of Active Voice Hardware,
(ii) twelve (12) months after expiration or termination of
the Agreement, or, (iii) upon any NEC modification to
the Active Voice Hardware if such modification might
affect the warranties herein.
(e) EXCLUSIVE REMEDY FOR ACTIVE VOICE HARDWARE: If any unit
of the Active Voice Hardware fails to comply with the
warranties as set forth above, Active Voice will, at
its own expense and as its sole obligation and NEC's sole
and exclusive remedy for any breach of this warranty, use
its Best Efforts to correct the noncompliance (e.g., by
furnishing a modification or replacement); provided that
(i) NEC returns the unit with an Active Voice issued Return
Authorization (RA) number to Active Voice (c/o Active Voice
Customer Service Representative at the Active Voice address
set forth in this Agreement), and (ii) Active Voice is able
to reproduce the noncompliance on the computer and
telecommunication system for which the item was designed.
If after the expenditure of its Best Efforts Active Voice
is unable to correct the noncompliance, Active Voice shall
refund NEC the compensation paid by NEC for the defective
unit of the Active Voice Hardware in which event such refund
shall be in full satisfaction of all claims relating to such
noncompliance.
11.3 THIRD PARTY SOFTWARE AND THIRD PARTY HARDWARE: Although Active
Voice provides a limited warranty on Active Voice Hardware, Third
Party Software and Third Party Hardware suppliers shall be
responsible for any warranties in connection with those products.
If any Third Party Software or Third Party Hardware fails to
operate in accordance with its specifications or is defective in
any way, NEC's sole and exclusive remedy shall be against the
Third Party Software or Third Party Hardware supplier. Third Party
Software and Third Party Hardware are provided subject to all of
the terms and conditions of the Third Party Documents and without
any Active Voice warranties, indemnities or support obligations
therefor. However, to the extent NEC requests Active Voice's
reasonable help in resolving any warranty claims NEC might have
against the Third Party Software and Third Party Hardware
suppliers, Active Voice agrees to cooperate and provide such help.
11.4 NEC WARRANTIES: Any warranties offered by NEC to NEC's Distributors
and End Users are not binding on Active Voice, even if Active Voice
becomes aware of such warranties, and NEC shall hold Active Voice
harmless from any and all claims arising from such warranties to
the extent they exceed Active Voice's warranties herein.
12. INDEMNIFICATION AND LIMITATION OF LIABILITY:
12.1 ACTIVE VOICE INDEMNIFICATION: Active Voice shall defend, indemnify
and hold NEC harmless from and against any and all actions,
claims, damages, expenses (including reasonable attorney's fees)
and liabilities arising from any claim against NEC that the
Licensed Software infringes any patent, copyright, or trade secret
in the countries listed in Exhibit G, attached hereto. This
indemnity shall apply provided that NEC (a) gives Active Voice
prompt, written notice of such claim; (b) permits Active Voice
to defend or settle the claim; and (c) provides Active Voice with
the assistance, information and authority necessary to defend or
settle the claim. Active Voice shall reimburse NEC for reasonable
out-of-pocket expenses incurred in providing such assistance. For
any covered claim, Active Voice shall pay the amount of any
settlement or the costs and damages awarded,
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but shall not be responsible for any settlement made without its
prior written consent, which shall not be unreasonably withheld or
delayed.
(a) LIMITATIONS: Active Voice shall have no liability for or
obligation to defend, settle or indemnify against any claim
of infringement arising from use by NEC of: (a) any version of
the Licensed Software that has been modified by NEC if such
modification contributed to the basis for bringing the claim
for which indemnification is sought, (b) any unauthorized
combination of the Licensed Software with other software,
equipment or devices, if such combination contributed to the
basis bringing of the claim for which indemnification is
sought, (c) any Third Party Software or Third Party Hardware
supplied with the Licensed Software, or (d) Modified Software
that has been modified according to NEC's specification or
request and such specification or request contributes to the
basis of the claim for which indemnification is sought.
(b) OPTIONS: If the Licensed Software, in the opinion of Active
Voice might become subject to a claim of infringement, Active
Voice may elect to: (a) obtain the right of continued use of
the Licensed Software for NEC, or (b) replace or modify the
Licensed Software to avoid such a claim as long as the
functionality of the Licensed Software remains substantially
the same. If neither alternative is available on commercially
reasonable terms, Active Voice may discontinue the specific
Licensed Software and pay to NEC a full refund of the price
paid to Active Voice for the affected and recalled Licensed
Software, and terminate the license for such product under
the Agreement.
(c) TERMINATION OF INDEMNITY: Any indemnity obligation of Active
Voice undertaken in this Section shall terminate upon the
earlier occurring of the following events: (i) twelve (12)
months after expiration or termination of the Agreement, or,
(ii) upon any NEC modification to the Licensed Software if
such modification might affect the basis for indemnified claim
herein.
(d) EXCLUSIVE REMEDY: The indemnity set forth in this Section 12.1
shall be NEC's sole and exclusive remedy with respect to any
infringement claim brought in connection with the Licensed
Software.
12.2 NEC INDEMNIFICATION: NEC agrees to defend, indemnify and hold
Active Voice harmless from and against any and all actions, claims,
damages, expenses (including reasonable attorney's fees) and
liabilities arising from NEC's use, modification, distribution and
sale of the Active Voice Deliverables and the NEC Products,
including but not limited to, suits and claims brought against
Active Voice by any third parties for NEC's breach of warranty to
such third party, but excluding infringement claims against the
Licensed Software covered under Section 12.1 above. NEC's duties
under this Section 12 extend to any matters arising out of the
alleged infringement by any NEC development, whether or not owned
by Active Voice and any NEC Products of any patent, copyright,
trade secret or trademark right in Japan and/or in the countries
listed in Exhibit G, attached hereto. This indemnification shall
apply provided that: (i) NEC is notified promptly in writing of
such claim; (ii) NEC controls the defense or settlement of the
claim; and (iii) Active Voice cooperates reasonably and gives all
necessary authority, information and assistance (at NEC's expense).
Active Voice will not be liable for any costs or damages, and NEC
will indemnify, defend and hold Active Voice harmless from any
expenses, damages, costs or losses resulting from any suit or
proceeding based upon a claim arising from: (a) Active Voice's
compliance with NEC's designs, specifications or instructions; (b)
modification of any product by a party other than Active Voice
after delivery by Active Voice, (c) the use of any product or any
part thereof furnished hereunder in combination with any other
product not furnished or authorized by Active Voice; (d) the direct
or contributory infringement of any process patent using any
product furnished hereunder.
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12.3 LIMITATION OF LIABILITY: EXCEPT FOR A BREACH BY EXCEEDING THE
LICENSE GRANTS OR VIOLATING THE RESTRICTIVE PROVISIONS IN
SECTIONS 3 AND 4 ABOVE OR A VIOLATION OF THE CONFIDENTIALITY
PROVISIONS IN SECTION 10 ABOVE, LIABILITY ARISING UNDER THIS
AGREEMENT SHALL BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE
DAMAGES AND NEITHER PARTY SHALL HAVE ANY LIABILITY FOR ANY INDIRECT
OR SPECULATIVE DAMAGES, INCLUDING, BUT NOT LIMITED TO
CONSEQUENTIAL, INCIDENTAL AND SPECIAL DAMAGES, SUCH AS LOSS OF USE,
BUSINESS INTERRUPTIONS, AND LOSS OF PROFITS, IRRESPECTIVE OF
WHETHER THE PARTY HAS ADVANCE NOTICE OF THE POSSIBILITY OF ANY SUCH
DAMAGES. NOTWITHSTANDING THE FOREGOING, ACTIVE VOICE'S TOTAL
LIABILITY TO NEC UNDER THIS AGREEMENT, INCLUDING UNDER SECTION
12.1, SHALL NOT EXCEED THE AMOUNT HAVING ACTUALLY BEEN PAID BY NEC
TO ACTIVE VOICE UNDER SECTION 7 OF THIS AGREEMENT FOR A PARTICULAR
PRODUCT DURING THE PREVIOUS TWELVE (12) MONTHS PRIOR TO NEC'S
NOTIFICATION OF ANY CLAIM AGAINST SUCH PRODUCT. THE PARTIES
ACKNOWLEDGE THAT THESE LIMITATIONS ON POTENTIAL LIABILITIES WERE AN
ESSENTIAL ELEMENT IN SETTING CONSIDERATION UNDER THIS AGREEMENT.
13. DISPUTE RESOLUTION; CHOICE OF LAW; JURY WAIVER:
13.1 DISPUTE ESCALATION PROCEDURE: In the event a dispute arises between
the Parties with respect to the subject matter of this Agreement,
both Parties agree to attempt to resolve the dispute through the
Project Managers in the ordinary course of business. However,
either Party may by written notice commence this escalation
procedure at any time should the Party feel the dispute cannot be
resolved in the ordinary course. Within five (5) days after
receipt, the Parties' first level contacts, Mary R. McCollum for
NEC and Linda Huseby, for Active Voice, will confer. If they are
unable to resolve the matter, the Parties' second level contacts,
Tom Burger for NEC and Frank Costa, for Active Voice, will confer
within ten (10) days after receipt of the initial notice. If the
matter has not been resolved within twenty (20) days after receipt
of the initial notice, then the Parties may commence arbitration
as set forth below.
13.2 CHOICE OF LAW: The construction, interpretation and performance of
this Agreement shall be governed by and construed in accordance
with the domestic laws of the State of Washington. The Parties
hereby consent to sole and exclusive jurisdiction of and venue in
the federal courts located in Seattle, Washington.
13.3 JURY WAIVER: Each of the Parties waives trial by jury and the right
to trial by jury in any and all actions or proceedings in any court
between them or to which they may be Parties, whether arising out
of, under or by reason of this Agreement, or any acts or
transactions, hereunder to the interpretation or validity thereof,
or under, or by reason of any other contract, agreement, loan, or
transaction of, any kind between them, or to which they may be
Parties, of any kind, nature, or description whatsoever.
14. ADDITIONAL TERMS:
14.1 RELATIONSHIP COMMITMENT: The Parties both acknowledge their intent
that this Agreement shall confirm the Parties' long-term commitment
to each other and provide a basis for the increasing priority of
the Parties' relationship. Accordingly, Active Voice on its part,
has agreed to provide NEC Most-Favored Buyer Terms on all of its
products and to enter into an investment agreement. In addition,
Active Voice agrees to provide free Licensed Software to NEC for
internal deployment and use at NEC and its Affiliates. NEC, on its
part, agrees that no other messaging company shall be given
preference
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over Active Voice with respect to volume commitments by NEC,
exclusivity in territories, market segments or sales channels
granted by NEC, or opportunities to bid on future product and sales
opportunities, without providing Active Voice an occasion to offer
better terms and lower prices to NEC on such future products and
sales opportunities.
14.2 CONFLICTS: Unless specifically stated to the contrary, in the event
of a conflict between this Agreement and any other document related
to the subject matter of this Agreement, or the body of this
Agreement and any of the Exhibits to this Agreement, the terms of
this Agreement, or the body of the SPA shall govern.
14.3 FORCE MAJEURE: Neither Party will be liable for any failure to
perform due to unforeseen circumstances or causes beyond its
reasonable control, including, but not limited to, acts of God,
war, embargoes, acts of civil or military authorities, delay in
delivery by vendors not caused by Active Voice, fire, flood, accident,
strikes, inability to secure transportation, facilities, fuel,
energy, labor or materials. In the event of force majeure, time for
delivery or other performance will be extended for a period equal
to the duration of the delay caused thereby.
14.4 EXPORT: NEC agrees to comply with the export laws and regulations
of Japan, the United States and any other country with jurisdiction
over the Licensed Software, the NEC Products and/or either Party or
its Affiliates. Active Voice agrees to observe and comply with the
export laws and regulations of the United States to the extent such
compliance depends on Active Voice. Without limiting the foregoing,
NEC agrees:
NEC shall not re-export the Licensed Software or any technology or
documentation it receives under this Agreement to a national of
Cuba, Iran, Iraq, Libya, North Korea, Sudan or Syria unless
specifically authorized by U.S. regulations, including, but not
limited to, the Export Administration Regulations ("EAR"),
including any successors or related laws or regulations, or by a
license issued by the U.S. Government.
NEC shall defend, indemnify and hold Active Voice harmless from and
against any and all claims, judgments, costs, awards, expenses
(including reasonable attorneys fees) and liability of any kind
arising out of the non-compliance with applicable government
regulations, statute, decree or other obligation with respect to
NEC's exportation or re-exportation of the Licensed Software. The
obligations under this Section shall survive the expiration or
termination of this Agreement.
14.5 NOTICES: Any notice required or permitted to be given under this
Agreement shall be effective on receipt if it is in writing and
sent by certified or registered mail, or insured courier, return
receipt requested, to the appropriate Party hereto at the address
set forth below and with the appropriate postage affixed. Either
Party may change its address for receipt of notice by notice to the
other Party in accordance with this Section.
If to NEC: NEC Corporation
7-1, Shiba-Chome
Minato-ku, Tokyo
108-01 Japan
Attn: General Manager, Legal Division
With a copy to: NEC America, Inc.
1555 West Walnut Hill Lane
Irving, Texas 75038
Attention: Director, Contracts & Credit
Administration
And to: NEC USA, Inc.
8 Corporate Center Drive
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Melville, New York 11747
Attn: General Counsel
If to Active Voice: Active Voice Corporation
2901 Third Avenue
Seattle, WA 98121
Attention: President
With a copy to: Active Voice Corporation
2901 Third Avenue
Seattle, WA 98121
Attn: General Counsel
14.6 SURVIVAL: All of the provisions in Sections 1, 3.1(c)(ii),
3.2(b)(i), 3.2(b)(ii), 4, 5, 6.5, 10, 12, 13, 14.2-14.13, and any
other provisions that expressly survive, shall survive expiration
or termination of this Agreement.
14.7 ASSIGNMENT: Neither Party may assign this Agreement or any rights,
benefits or obligations hereunder, without the other Party's
written consent, except to an Affiliate, or, in the event of: (a) a
merger of the assigning Party, (b) an acquisition of the assigning
Party wherein more than fifty-percent (50%) of the outstanding
voting stock of the assigning Party is acquired, or (c) a sale of
all or substantially all of the assets of the assigning Party to
which this Agreement relates.
14.8 RELATIONSHIP: In all matters relating to this Agreement, NEC and
Active Voice shall act as independent contractors. Neither Party
will represent that it has any authority to assume or create any
obligation, expressed or implied, on behalf of the other Party, or
to represent the other Party as agent, employee, or in any other
capacity. Neither Party shall have any obligation, expressed or
implied, except as expressly set forth herein.
14.9 INTERPRETATION: This Agreement has been negotiated at arm's length
and between persons sophisticated and knowledgeable in the matters
dealt with in this Agreement. Each Party has been represented by
experienced and knowledgeable legal counsel. Accordingly, any rule
of law or legal decision that would require interpretation of any
ambiguities in this Agreement against the drafting Party is not
applicable and is hereby waived.
14.10 ENTIRE AGREEMENT, SUPERSEDURE AND AMENDMENT: This Agreement
supersedes all of the agreements, amendments, exhibits and/or
addenda listed in Section III of the Recitals or otherwise and
supersedes all prior proposals, agreements and representations
between them, whether written or oral, relating to the subject
matter contained herein. This Agreement may be amended only if
agreed to in writing and signed by an authorized signatory of each
Party.
14.11 SEVERABILITY: All rights and remedies, whether conferred hereunder,
or by any other instrument or law will, unless otherwise expressly
stated, be cumulative and may be exercised singularly or
concurrently. The failure of any Party to enforce any of the
provisions hereof shall not be construed to be a waiver of the
right of such Party thereafter to enforce such provisions. The
terms and conditions stated herein are declared to be severable. If
any provision or provisions of the Agreement shall be held to be
invalid, illegal or unenforceable, they shall be enforced to the
maximum amount possible. The validity, legality and enforceability
of the remaining provisions shall not in any way be affected or
impaired thereby.
14.12 COUNTERPARTS: This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
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14.13 EXHIBITS: The Exhibits listed below are attached and made a part of
this Agreement. Any capitalized items used in the Exhibits shall be
as defined in the Agreement.
<TABLE>
<S> <C> <C>
EXHIBITS A DEFINITIONS
B SPECIFIC PRODUCT ADDENDA
C GENERAL DEVELOPMENT PROVISIONS
D SUPPORT PLANS
E TRAINING PROGRAMS
F MINIMUM END USER TERMS
G INDEMNIFIED COUNTRIES
H AFFILIATE ENROLLMENT
I TRADE SECRET TRANSMITTAL FOR AAINFO
</TABLE>
AGREED TO AND ACCEPTED:
NEC CORPORATION ACTIVE VOICE CORPORATION
By: /s/ Hideaki Kihara By: /s/ Frank J. Costa
------------------------------------ -------------------------------
Title: V.P. Switching & Mobile Systems, Title: President & CEO
--------------------------------- ----------------------------
Operations Unit Date: May 5, 1999
- --------------------------------------- ------------------------------
Date: May 5, 1999
----------------------------------
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EXHIBIT A
DEFINITIONS
1. "ACTIVE VOICE DELIVERABLES" shall mean the Licensed Software, Active
Voice Hardware, Technical Documentation, End User Documentation, and any
other materials, information or rights disclosed, provided or licensed
by Active Voice under this Agreement, specifically excluding any Third
Party Software or Third Party Hardware. The Active Voice Deliverables
for a particular product are listed and described in the SPA for that
product, attached as an addenda to Exhibit B.
2. "ACTIVE VOICE HARDWARE" shall mean the hardware components that Active
Voice provides to NEC under this Agreement for which Active Voice
undertakes any warranty, support and/or indemnity obligation to NEC.
Components deemed Active Voice Hardware shall be so specified in any SPA.
3. "AFFILIATES" shall mean any entity on or after the Effective Date
controlling, controlled by or under common control with a Party. The
term "control" herein shall mean the legal, beneficial or equitable
ownership, directly or indirectly of more than fifty percent (50%) of
the aggregate of all voting equity in such entity. An entity shall be
deemed an Affiliate only for so long as such common control shall last.
4. "BEST EFFORTS" shall mean that a Party has exercised its best efforts
possible under the circumstances to effect a particular result; however,
such standard shall not obligate a Party to incur any significant
hardship, cost or other detriment that is disproportionate in comparison
to the benefit to either Party or the desired result. If a Party
obligated to exercise Best Efforts encounters any situation where Best
Efforts are not feasible or practical, the parties agree to discuss in
good faith the appropriate amount of effort that should be required in
that case.
5. "BETA TESTING" shall mean the external field test activity intended to
demonstrate that the Licensed Software substantially conforms to the
Specifications in the applicable Statement of Work.
6. "CHANGE ORDER" shall mean a written agreement executed by authorized
representatives of both Parties to modify and amend a Statement of Work.
7. "DERIVATIVE WORK" shall mean any modification, alteration or adaption
to an existing work and/or any work that would be deemed a derivative
work under the Copyright Act, Title 17 of the U.S. Code, as amended.
8. "DISTRIBUTOR" shall mean any party, including any NEC Affiliate, that
receives a license from NEC to market and distribute the Licensed
Software and/or Hardware Products. The term "Distributor" shall include,
but not be limited to, resellers, original equipment manufacturers,
value added resellers, systems integrators, dealers, agents and
subdistributors of NEC Products.
9. "END USER" shall mean any person or entity that purchases the Licensed
Software for his, her or its personal use.
10. "END-USER DOCUMENTATION" shall mean any End User installation and user
guides, manuals, and other technical information in printed and
machine-readable form that are normally provided by Active Voice to End
Users of the Licensed Software, as further described in Exhibit H.
11. "ENROLLED AFFILIATE" shall mean any NEC Affiliate enrolled as a direct
Party to this Agreement via execution of an Enrollment Agreement with
Active Voice and NEC.
12. "FINAL ACCEPTANCE" shall mean final acceptance of an Active Voice
Deliverable under the provisions of Section 3.2 in Exhibit C to the
Agreement.
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13. "HARDWARE PRODUCT" shall mean a hardware product delivered by Active
Voice to NEC hereunder that might be comprised of Active Voice Hardware,
Third Party Hardware, Licensed Software and/or Third Party Software.
14. "NEC HARDWARE SYSTEM" shall mean an interface board providing voicemail
functionality when used with telephone systems which are manufactured by
or for NEC, or supplied by or to NEC on an OEM basis. Such Hardware
Systems shall meet applicable specifications for the Licensed Software,
as such specifications may be set forth in a SPA.
15. "HDD" shall mean a hard disk drive onto which either Active Voice or NEC
installs the Licensed Software and any Third Party Software.
16. "INTELLECTUAL PROPERTY RIGHTS" shall mean rights, whether prospective,
pending or registered, including any renewals thereof, under or in
connection with any patents (for the duration thereof), copyrights,
maskworks, trade secrets, trademarks, service marks, trade dress,
tradenames and other intangible property rights.
17. "KEY" shall mean a key device designated by Active Voice as: (a) a
"Production Key" which allows the Licensed Software to be downloaded to
the NEC Hardware System, or (b) a "System Key" which allows an End User
to utilize a specified number of ports in the Licensed Software.
18. "LICENSED SOFTWARE" shall mean an Active Voice computer program,
including any Maintenance Release or New Release thereto, and any
Derivative Work created therefrom by Active Voice or the Parties
jointly, specifically delivered to NEC by Active Voice under a SPA and
licensed by Active Voice to NEC under the Agreement. Licensed Software
may be installed in Hardware Products. In such case, the installed
Licensed Software shall not lose its independent identity and shall
still be identified as Licensed Software under this Agreement and not as
part of or merged into any such Hardware Product. For purposes of this
Agreement, "Licensed Software" shall not include: (a) any software owned
by NEC under the provisions of Section 5.5 of the Agreement, even if
Active Voice has contributed to the design or development of such
software; (b) any Third Party Software unless specifically included in
the Licensed Software; or (c) any software in any Third Party Hardware
unless specifically included in the Licensed Software.
19. "LOCALIZING" or "LOCALIZATION" shall mean translating the Licensed
Software, End User or Technical Documentation from English into another
language and making any other changes for reasonably necessary cultural
reasons. Localizing or Localization shall not include feature
improvement, added functionality, and/or engineering changes for
interoperability or compatibility purposes.
20. "MAINTENANCE RELEASE" shall mean any release or patch to an existing
release of Licensed Software designed primarily to correct bugs or
errors in previous releases.
21. "MFB TERMS" shall mean Most-Favored Buyer Terms. For purposes of this
Agreement, Most-Favored Buyer Terms means that NEC shall receive a price
at least as low as the lowest price Active Voice offers to another
similarly-situated customer in connection with substantially equivalent
products, services or the Licensed Software. For purposes of this
definition, "substantially equivalent" shall mean substantially
equivalent in terms of features, functionality, development
responsibilities, Intellectual Property Rights contributions, payment
terms, funding, promotional and marketing efforts and abilities, market
served and unit volume levels and guarantees. In addition to receiving
MFB Terms for price, NEC shall also receive overall terms at least as
favorable as those granted to any other party with respect to the
Licensed Software.
22. "MODIFIED END USER DOCUMENTATION" shall mean End User Documentation that
has been modified, translated or localized by NEC or by Active Voice for
NEC pursuant to a Statement of Work, for distribution with NEC Products.
23. "MODIFIED SOFTWARE" shall mean any modification to or Derivative Work
created from the Licensed Software pursuant to a Statement of Work.
24. "NEC" shall mean NEC Corporation and any Enrolled Affiliate.
-24-
<PAGE>
25. "NEC PRODUCTS" shall mean products distributed by NEC under the NEC
name or the name of an NEC Affiliate, that include or incorporate
the Licensed Software or Hardware Product, in whole or in part,
and/or upgrades, modifications, new releases and/or new versions of
such products.
26. "NEW RELEASE" shall mean an enhanced or revised release of the
Licensed Software, as sometimes signified in the software industry
by a change in the digit which appears immediately to the left or
right of the decimal point in the version number.
27. "NEW PRODUCT" shall mean a product that Active Voice adds to its
product line on a general basis. New Products do not include any
products, features or functionality developed by Active Voice at
the request, with the assistance, or implementing the Intellectual
Property Rights of any third party.
28. "NRE" shall mean non-recurring expenses associated with development
of NEC Products.
29. "OBJECT CODE" shall mean software, including all computer
programming code, entirely in binary form, which is directly
executable by a computer after suitable processing but without the
intervening steps of compilation or assembly, and all help,
message, and overlay files thereto.
30. "PRODUCT DISCONTINUANCE" shall mean discontinuance of an Active
Voice product as determined by the criteria set forth in Section
2.6 of the Agreement.
31. "ROYALTY UNIT AND/OR USE" shall mean a copy of the Licensed
Software, in whole or in part, or an authorized use of the Licensed
Software on a per server, per seat or per function basis, that is
sold, licensed or distributed by NEC or its Distributors under the
terms of this Agreement.
32. "SOURCE CODE" shall mean the software code from which Object Code
is compiled. Source Code includes the commented software source
code, as well as other materials such as design documents, data
models, help materials, tutorial programs and any information or
other programs necessary to compile the Source Code into
executable, fully-functioning Object Code.
33. "SPA" shall mean a Specific Product Addendum, as described in
Section 1.4 of the Agreement and as shall be attached to Exhibit B.
34. "SPECIFICATIONS" shall mean the technical specifications for the
Licensed Software, as referenced in Exhibit H, attached hereto.
Specifications shall also mean the technical specifications in any
Statement of Work.
35. "STANDARD PRODUCT SPECIFICATION DOCUMENTS" shall mean the
specifications published and made available by Active Voice on a
general basis for various Active Voice products, as such
specifications shall be referenced in particular SPAs.
36. "STATEMENT OF WORK" shall mean a Statement of Work for the Licensed
Software, as may be attached to any SPA.
37. "SUPPORT" shall mean the support services that Active Voice
provides to NEC in accordance with the Support Plan set forth in
Exhibit D, attached hereto.
38. "TECHNICAL DOCUMENTATION" shall mean the design and architecture
documentation that Active Voice provides to NEC under this
Agreement.
39. "TEST PLAN" shall mean the plan used to evaluate the substantial
conformity of an Active Voice Deliverable to a particular Statement
of Work or Specification.
40. "THIRD PARTY HARDWARE" shall mean any third party hardware,
including any documentation or other materials provided therewith,
that Active Voice provides, or reprovides after loading, to NEC, its
Distributors and/or End User customers on a pass-through license
and warranty basis, with no additional Active Voice obligation
undertaken.
41. "THIRD PARTY SOFTWARE" shall mean any software licensed or sold by
any third party to Active Voice and/or NEC, including documentation
or other materials, that Active Voice provides to NEC on a
pass-through basis with the Licensed Software or Active Voice
Hardware.
-25-
<PAGE>
42. "THIRD PARTY DOCUMENTS" shall mean the end-user license agreements
and documentation for Third Party Software or Third Party Hardware
that contain the terms and conditions of use for such Third Party
Software or Third Party Hardware.
43. "TRAINING" shall mean the training services that Active Voice
provides to NEC in connection with the Licensed Software or Active
Voice Hardware, in accordance with Exhibit E, attached to the
Agreement.
44. "YEAR 2000 READY" shall mean that a product, will during the
applicable warranty period set forth in the Agreement, be capable
of accurately and correctly performing calculations and fully
performing all operations involving dates falling on or after
January 1, 2000, including leap year calculations, but not
limited to storing, retrieving, processing, presenting,
manipulating and/or receiving such dates, and regardless of whether
such dates are read from an internal clock within hardware or
entered by a user provided that all products (for example,
hardware, software and firmware) used with the product properly
exchange accurate date data with it.
-26-
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
on: (a) Form S-8, No. 33-80168 pertaining to the Company's 1984 Incentive
Stock Option Plan, 1988 Non-qualified Stock Option Plan, Directors' Stock
Option Plan, and other Employee Benefit Plans; (b) Forms S-8, No. 33-80168
and No. 333-0745 pertaining to the Company's 1993 Stock Option Plan, as
amended; (c) Form S-8, No. 333-07331 pertaining to the Company's 1996 Stock
Purchase Plan; (d) Form S-8, No. 333-30451 pertaining to the Company's 401k
Plan; (e) Form S-8, No. 333-21739 and 333-58101 pertaining to the Company's
1996 Stock Option Plan, as amended; and (f) Form S-8, No. 333-58103
pertaining to the Company's 1998 Stock Option Plan and 1997 Director Stock
Option Plan, of our report dated May 13, 1999, 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, 1999
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Seattle, Washington
June 25, 1999
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