<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-22804
------------------------
ACTIVE VOICE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-123511
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (zip code)
(Address of principal executive
offices)
</TABLE>
(206) 441-4700
(Registrant's telephone number, including area code)
------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING
CLASS AT FEBRUARY 1, 2000
<S> <C>
Common Stock, No Par Value 5,111,695
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 9
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............... 18
SIGNATURE PAGE.............................................. 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $ 22,170 $ 16,629 $ 60,877 $ 44,334
Cost of goods sold................................ 9,088 8,127 25,673 20,676
--------- --------- --------- ---------
Gross profit...................................... 13,082 8,502 35,204 23,658
Operating expenses:
Research and development........................ 3,760 3,568 11,737 10,169
Sales and marketing............................. 6,333 4,440 17,082 12,636
General and administrative...................... 2,388 2,014 6,755 6,106
License fee..................................... 2,521 2,521
--------- --------- --------- ---------
Total operating expenses...................... 15,002 10,022 38,095 28,911
--------- --------- --------- ---------
Operating loss.................................... (1,920) (1,520) (2,891) (5,253)
Interest expense.................................. (75) (17) (334) (50)
Interest income................................... 257 49 594 289
Impairment of strategic investment................ (1,169)
Gain on sale of technology........................ 16,504
--------- --------- --------- ---------
Income (loss) before income taxes and minority
interest........................................ (1,738) (1,488) 12,704 (5,014)
Income tax benefit (provision).................... 569 39 (3,695) 1,249
Minority interest in earnings of consolidated
subsidiary...................................... (5) (41) (136) (40)
--------- --------- --------- ---------
Net income (loss)................................. $ (1,174) $ (1,490) $ 8,873 $ (3,805)
========= ========= ========= =========
Earnings (loss) per share:
Basic........................................... $ (0.24) $ (0.32) $ 1.89 $ (0.82)
========= ========= ========= =========
Diluted......................................... $ (0.24) $ (0.32) $ 1.76 $ (0.82)
========= ========= ========= =========
Shares used in earnings (loss) per share
calculation:
Basic........................................... 4,874,296 4,629,223 4,696,204 4,655,378
========= ========= ========= =========
Diluted......................................... 4,874,296 4,629,223 5,034,962 4,655,378
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,557 $ 1,650
Marketable securities..................................... 6,479 1,113
Accounts receivable, less allowances...................... 13,470 13,622
Inventories............................................... 8,978 5,924
Income taxes receivable................................... 874 741
Deferred tax asset........................................ 2,223 1,650
Prepaid expenses and other assets......................... 1,736 3,215
------- -------
Total current assets.................................... 39,317 27,915
Marketable securities....................................... 3,708 1,701
Furniture and equipment, net................................ 5,870 4,589
Other assets................................................ 3,029 4,377
------- -------
Total assets............................................ $51,924 $38,582
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,559 $ 4,983
Accrued compensation and benefits......................... 3,033 2,500
Other accrued expenses.................................... 1,858 2,186
------- -------
Total current liabilities............................... 7,450 9,669
Commitments
Minority interest........................................... 81 (55)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares--2,000,000--none outstanding
Common stock, no par value:
Authorized shares--10,000,000
Issued shares, including repurchased shares--5,059,780
(4,976,933 at March 31, 1999)......................... 21,595 17,314
Retained earnings......................................... 22,765 13,907
Accumulated other comprehensive income.................... 33 20
Less 395,153 repurchased shares at March 31, 1999, at
cost.................................................... (2,273)
------- -------
Total stockholders' equity.................................. 44,393 28,968
Total liabilities and stockholders' equity.............. $51,924 $38,582
======= =======
</TABLE>
- ------------------------
Note: The consolidated balance sheet at March 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. See notes to consolidated financial
statements.
4
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 8,873 $(3,805)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................. 1,505 1,260
Provisions for accounts receivable........................ 225 269
Deferred income taxes..................................... (553) 62
Loss on disposal of equipment............................. 6 17
Minority interest in earnings of consolidated
subsidiary.............................................. 136 40
Gain on sale of technology................................ (16,504)
Changes in operating assets and liabilities:
Increase in accounts receivable......................... (73) (844)
Decrease (increase) in inventories...................... (3,054) 3,861
Decrease (increase) in prepaid expenses and other
assets................................................ 2,674 (3,471)
Decrease in accounts payable............................ (2,424) (1,552)
Increase (decrease) in other liabilities................ (783) 1,858
-------- -------
Net cash used in operating activities................. (9,972) (2,305)
INVESTING ACTIVITIES
Proceeds from sale of technology............................ 18,000
Proceeds from sale and maturity of marketable securities.... 909 3,629
Purchases of marketable securities.......................... (8,340)
Purchases of furniture and equipment........................ (2,621) (2,243)
-------- -------
Net cash provided by investing activities............. 7,948 1,386
FINANCING ACTIVITIES
Net issuance of short term notes payable.................... 173
Repurchase of common stock.................................. (800)
Proceeds from exercise of stock purchase warrant............ 4,000
Proceeds from employee stock option and stock purchase
plans..................................................... 1,880 348
-------- -------
Net cash provided by (used in) financing activities... 5,880 (279)
Effect of exchange rate changes on cash and cash
equivalents............................................... 51 (10)
-------- -------
Increase (decrease) in cash and cash equivalents............ 3,907 (1,208)
Cash and cash equivalents at beginning of period............ 1,650 1,550
-------- -------
Cash and cash equivalents at end of period.................. $ 5,557 $ 342
======== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Active Voice
Corporation and subsidiaries (the Company) are unaudited. In the opinion of the
Company's management, the financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to state fairly the
financial information set forth therein. Results of operations for the three
month and nine month periods ended December 31, 1999 are not necessarily
indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended March 31, 1999.
2. REVENUE RECOGNITION POLICY
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 no charge
telephone support to customers, which are not significant to the individual sale
and typically provided within one month from the date of shipment, as the
related revenues are recognized. The Company does not offer unspecified upgrades
or enhancements to its products. Revenue from training services is not
significant and is recognized as the related services are provided.
The Company allows product returns without charge within the initial thirty
days following the date of sale and provides an allowance for estimated returns
based on historical experience. The Company offers a one-year warranty on its
software products. As the cost of software replacement under the warranty is not
significant, the Company does not provide for future warranty claims.
3. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Computer equipment............................. $6,910 $3,049
Custom component parts......................... 1,211 1,918
Supplies....................................... 857 957
------ ------
$8,978 $5,924
====== ======
</TABLE>
4. COMPREHENSIVE INCOME
Total comprehensive loss was $(1,169,000) and $(1,448,000) for the three
month periods ended December 31, 1999 and 1998, respectively. Total
comprehensive income (loss) was $8,886,000 and $(3,833,000) for the nine month
periods ended December 31, 1999 and 1998, respectively.
6
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1999
5. LICENSE FEE
During the spring of 1996, the Company received communication from Lucent
Technologies, Inc. (Lucent) asserting that certain of the Company's products
infringed nine Lucent patents. Lucent offered to license these patents in the
area of interactive messaging and response to the Company. The Company evaluated
Lucent's claims and concluded that the Company had substantive arguments that
its products did not infringe upon the asserted patents. The Company also
asserted that certain Lucent products infringed upon the Company's patents in
the area of computer telephony integration. In October 1999, in an attempt to
avoid costly litigation and distraction of the Company's management, the Company
entered into a cross-licensing agreement under which the parties released each
other from claims of past infringement and granted each other a five year
license to use the respective patents.
Based on an assessment of the age and use of the technology of the
underlying Lucent patents, the related claims by Lucent and the Company's recent
revenue composition, the Company estimated that $2.5 million of the net
settlement was attributable to the release from claims relating to prior
periods. The remaining balance of $0.5 million was estimated to be attributable
to the five year license to use the Lucent patents, net of the estimated value
of the Company's patented technology being licensed to Lucent. Accordingly, the
$2.5 million has been recognized as a License Fee in the quarter ended
December 31, 1999. The remaining balance of $0.5 million is capitalized as other
long-term assets and will be amortized on a straight-line basis as cost of goods
sold over the estimated remaining useful life of three years.
6. SUBSEQUENT EVENTS
On January 28, 2000 the Company entered into a Stock Acquisition Agreement
to acquire privately-held PhoneSoft Inc. in exchange for 85,083 shares of the
Company's common stock. PhoneSoft is a provider of computer telephony software
and technology and has developed unified messaging applications that provide
voice mail and auto-attendant functionality in the Lotus Notes/Domino
environment. In connection with the acquisition, the employees of PhoneSoft will
join the company. The Company is in the process of determining the appropriate
method of accounting for the acquisition.
7
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
DECEMBER 31, 1999
7. 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>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)................................. $ (1,174) $ (1,490) $ 8,873 $ (3,805)
========= ========= ========= =========
Denominator:
Denominator for basic earnings (loss) per share-
weighted average shares......................... 4,874,296 4,629,223 4,696,204 4,655,378
Effect of dilutive securities:
Stock purchase warrant.......................... 70,925
Stock options................................... 267,833
--------- --------- --------- ---------
Denominator for diluted earnings (loss) per share-
adjusted weighted average shares and assumed
conversions..................................... 4,874,296 4,629,223 5,034,962 4,655,378
========= ========= ========= =========
Basic earnings (loss) per share:.................. $ (0.24) $ (0.32) $ 1.89 $ (0.82)
========= ========= ========= =========
Diluted earnings (loss) per share:................ $ (0.24) $ (0.32) $ 1.76 $ (0.82)
========= ========= ========= =========
</TABLE>
The calculation of diluted earnings per share for the three month period
ended December 31, 1999 did not include the effect of 621,567 weighted average
shares from outstanding stock options and a stock purchase warrant as their
inclusion would have been antidilutive. The calculation of diluted earnings per
share for the three month and nine month periods ended December 31, 1998 did not
include the effect of 1,750 and 14,996 weighted average shares from outstanding
stock options, respectively, as their inclusion would have been antidilutive.
8
<PAGE>
ITEM 2. 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, unified messaging applications 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's principal products consist
of: Unity, Repartee, Replay Plus, Replay, Lingo and a line of "inswitch" or
"embedded" products. Unity, the Company's most recent product introduction,
offers 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. VP offers
basic messaging capability while the CTI version serves as the base for
TeLANophy, a suite of the Company's CTI modules which provides call management
and integrated messaging capabilities. The Company's Replay and Replay Plus
products provide basic voice processing features at a price point attractive to
the small business market. Lingo offers 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. Embedded products, available only to certain of the
Company's telephone equipment manufacturer partners, combine Active Voice
software with third party hardware that is bundled with the phone switch,
offering a convenient alternative to a traditional PC-based voice mail system.
FORWARD LOOKING INFORMATION
CERTAIN STATEMENTS IN THIS QUARTERLY 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 FORWARD-LOOKING STATEMENT. (REFER TO THE SECTION ENTITLED
"RISK FACTORS AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION OF
SOME OF THE INVOLVED RISKS AND UNCERTAINTIES.)
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Net sales.............................. $22,170 $16,629 33.3% $60,877 $44,334 37.3%
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999
Net sales to the Company's Americas dealer network during the quarter ended
December 31, 1999 increased by 43% from the comparable period in the prior
fiscal year. Net sales to the Americas dealers represented 53% of total net
sales for the three months ended December 31, 1999 compared to 49% of total net
sales for the three months ended December 31, 1998. The increase in net sales in
the Americas dealer channel was primarily attributable to revenues associated
with the Company's Year 2000 (Y2K) program, which provides discounts to dealers
upgrading their customers' non-Y2K compliant systems to current software
versions and hardware platforms. The Company believes that approximately 45-50%
of its
9
<PAGE>
installed product base has been upgraded under the program. The Company
estimates that Y2K upgrades will begin to decline steadily during the fourth
quarter of fiscal year 2000 but is uncertain as to the rate of decline or when
the upgrade process will be substantially complete. Sales of Unity also
contributed to the increase in net sales during the quarter ended December 31,
1999. While interest in Unity continues to exceed management's expectations in
the Americas channel, revenues accounted for less than 10% of total Americas net
sales.
Net sales to the strategic partner sales channel increased by 14% for the
three months ended December 31, 1999 over the comparable period in the prior
fiscal year. Net sales to strategic partner customers represented 26% and 31% of
total net sales for the three month periods ended December 31, 1999 and 1998,
respectively. The majority of the increase in strategic partner sales is
attributable to increased unit sales of Repartee, partially offset by declines
in Lingo revenues due to decreased unit volumes. Revenue from Unity also
contributed to the increase, although Unity sales accounted for less than 5% of
total strategic partner net sales. The Company's largest strategic partner
accounted for approximately 72% of total strategic partner sales and
approximately 19% of total net sales during the three months ended December 31,
1999.
Net sales to international customers increased by 34% during the three
months ended December 31, 1999 in comparison to the prior year's same quarter.
International sales represented 16% of total net sales for both the three month
periods ended December 31, 1999 and December 31, 1998. The increase in net sales
to the international channel can be attributed to continued strength in the
European market, where unit sales of the Company's Repartee, Replay and Replay
Plus products have increased with the introduction of localized versions and the
Lingo product has been successfully introduced to the UK market.
Other revenue increased 67% on a year over year basis during the quarter
ended December 31, 1999 and represented 5% and 4% of the Company's total net
sales in the quarters ended December 31, 1999 and December 31, 1998,
respectively. The increase in other revenue is attributable to increased sales
of Visual Basic-based voice application tools and custom application design
services through the Company's majority-owned Pronexus subsidiary.
NINE MONTHS ENDED DECEMBER 31, 1999
Net sales to the Company's Americas dealer network increased approximately
31% in the nine months ended December 31, 1999 over the comparable period in the
prior fiscal year. Net sales to the Americas dealer channel represented
approximately 50% of total net sales for the nine months ended December 31, 1999
compared to approximately 52% of total net sales for the nine months ended
December 31, 1998. The majority of the increase in net sales was attributable to
the Company's Y2K upgrade program discussed above.
Net sales to the strategic partner sales channel during the nine months
ended December 31, 1999 increased by approximately 44% from the comparable
period in the prior fiscal year. Net sales to strategic partners represented 31%
and 29% of total net sales for the nine month periods ended December 31, 1999
and 1998, respectively. The increase in net sales to strategic partners was
primarily due to increased unit sales of embedded systems. The largest strategic
partner accounted for approximately 73% of total strategic partner sales and
approximately 23% of total net sales during the nine months ended December 31,
1999.
Net sales through the international channel increased by approximately 43%
during the nine months ended December 31, 1999 from the comparable period in the
prior fiscal year. International sales represented 15% of total net sales for
both of the nine month periods ended December 31, 1999 and 1998. Sales growth
increased in all of the Company's primary international markets, attributed to
increased localization efforts.
10
<PAGE>
Other revenue increased by 54% during the nine months ended December 31,
1999 in comparison to the same period of the prior year and represented 4% of
the Company's total net sales in both periods. The increase in other sales for
the nine month period ended December 31, 1999 is attributed to increased sales
through the Company's Pronexus subsidiary.
GROSS MARGIN
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Gross profit............................ $13,082 $8,502 53.9% $35,204 $23,658 48.8%
Percentage of net sales................. 59.0% 51.1% 57.8% 53.4%
</TABLE>
The Company's gross margin varies in part depending upon the mix of
higher-margin voiceboard-and-software kit sales (offered to all customers) and
software-only sales (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 by each distribution channel also
affects the overall gross margin, as international sales have historically had
higher gross margins than sales in the other distribution channels.
The increase in overall gross margin percentage in the three month and nine
month periods ended December 31, 1999 in comparison to the comparable periods in
the prior fiscal year is primarily attributable to increased sales of
software-only embedded product to the Company's strategic partners. Lower PC
hardware component costs also contributed to the increase in gross margin
percentage. In addition, the Company sold a higher proportion of software under
the Y2K upgrade program during the three months ended December 31, 1999 than in
previous quarters, which also contributed to the gross margin percentage
improvement.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Research and development................. $3,760 $3,568 5.4% $11,737 $10,169 15.4%
Percentage of net sales.................. 17.0% 21.5% 19.3% 22.9%
</TABLE>
The increases in research and development expenses between the three month
and nine month periods ended December 31, 1999 and 1998 were attributable to an
increase in compensation-related costs. The increased compensation expense was
associated with additional engineering and development personnel and higher
engineering salaries due to the competitive nature of the labor market and the
Company's effort to attract and retain skilled employees. The increase in
engineering personnel is attributable to the development of Unity, the Company's
Windows NT-based product, as well as to the addition of quality assurance staff
leading up to the release of Unity 2.0 in March 1999. Subsequent to the initial
product release, the Company's personnel continued to add features and enhance
the functionality of the Unity product, which has contributed to the increase in
expenses, although the hiring rate of development personnel for Unity has
declined. The Company also continues to allocate substantial resources to the
localization of products for international markets and customization of products
for strategic partner accounts.
11
<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. With the general release of Unity 2.0 completed in March 1999, the
Company expects the growth rate of research and development expenditures to slow
in comparison to the last two years and that these expenses as a percentage of
sales will vary from period to period. This is evidenced in the three and nine
month periods ended December 31, 1999 when compared to the prior year's
comparable periods, as the Company leveraged its research and development
expenses over a higher revenue base.
SALES AND MARKETING
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Sales and marketing...................... $6,333 $4,440 42.6% $17,082 $12,636 35.2%
Percentage of net sales.................. 28.6% 26.7% 28.1% 28.5%
</TABLE>
The increases in sales and marketing expenses during the three month and
nine month periods ended December 31, 1999 over the comparable periods in the
prior fiscal year were primarily attributable to increased compensation-related
expenses associated with growth in sales and marketing personnel and higher
commission expense due to increased sales levels. The increase in unit sales
volume has also caused expenses to be higher when compared to the prior year, as
more resources are required to meet increased unit installations. Marketing and
customer support costs related to the Unity product have also contributed to the
increase in sales and marketing expense since the product's introduction.
Specifically, expenses related to attendance and booth space at a European trade
show held every four years contributed to some of the increase. Sales and
marketing expenses include both costs that are essentially fixed as well as
costs that vary 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.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
General and administrative................. $2,388 $2,014 18.6% $6,755 $6,106 10.6%
Percentage of net sales.................... 10.8% 12.1% 11.1% 13.8%
</TABLE>
The increases in general and administrative expenses between comparable
three month and nine month periods ended December 31, 1999 when compared to the
prior year's periods were primarily attributable to increased
compensation-related expenses due to the hiring of additional general and
administrative personnel and higher salary levels. Legal costs, primarily
related to intellectual property and contract matters, also increased over the
prior periods. General and administrative expenses, being relatively fixed in
nature, can be expected to fluctuate as a percentage of net sales from period to
period.
12
<PAGE>
LICENSE FEE
In October 1999, the Company entered into a cross-licensing agreement with
Lucent Technologies, Inc. under which the parties released each other from
claims of patent infringement and granted each other a five year license to use
the respective patents.
Based on an assessment of the age and use of the technology of the
underlying Lucent patents, the related claims by Lucent and the Company's recent
revenue composition, the Company estimated that $2.5 million of the net
settlement was attributable to the release from claims relating to prior
periods. The remaining balance of $0.5 million was estimated to be attributable
to the five year license to use the Lucent patents, net of the estimated value
of the Company's patented technology being licensed to Lucent. Accordingly, the
$2.5 million has been recognized as a License Fee in the quarter ended
December 31, 1999. The remaining balance of $0.5 million is capitalized as other
long-term assets and will be amortized on a straight-line basis as cost of goods
sold over the estimated remaining useful life of three years.
INTEREST EXPENSE AND INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest expense................................ $(75) $(17) 341.2% $(334) $ (50) 568.0%
Interest income................................. $257 $ 49 424.5% $ 594 $ 289 105.5%
</TABLE>
The increases in interest expense between the three month and nine month
periods ended December 31, 1999 and 1998 are primarily attributable to
$4 million advanced under a borrowing agreement with a significant customer,
which was converted into common stock in connection with the exercise of a stock
purchase warrant. The increases in interest income during the three month and
nine month periods ended December 31, 1999 in comparison to the corresponding
periods in the prior fiscal year were primarily attributable to higher average
invested cash and marketable security balances. Average invested cash and
marketable security balances increased due to the $18 million sale of technology
assets on June 30, 1999 described below. Refer to "Liquidity and Capital
Resources."
GAIN ON SALE OF TECHNOLOGY
On June 30, 1999, the Company sold real-time Internet communications
technology and related intangible assets (the Technology) for $18 million. Legal
and compensation costs associated with the transaction were approximately
$1.5 million, resulting in a $16.5 million gain.
The Technology provides desktop-to-desktop instant messaging similar to the
offerings by numerous internet portal companies such as Yahoo Messenger, MSN
Hotmail and AOL Instant Messenger, including permission-based instant text,
voice and video messaging, instant file transfer and URL sharing, multi-party
chat, Internet voice and video call support, find-me/follow-me message routing,
access to schedule and availability information, and personal communications Web
pages. At the time of sale the Company was using the Technology for internal
communications and allowing company contacts and acquaintances to test the
software. No current or historical revenues were attributable to the Technology
at the time of the sale. In connection with the sale, the Company's instant
messaging group, consisting of four software developers, a software tester and a
market researcher, joined the staff of the acquiring company.
It was the intention of the Company to integrate some of the Technology into
its core product offerings. However, it became apparent in the quarter prior to
the sale that the Company needed working capital. Consequently, the agreement
allows for a license back of certain rights to the Technology, but is
13
<PAGE>
limited to use in conjunction with traditional or Internet Protocol (IP)
switching in the areas of enterprise unified messaging, voice processing, and
real-time call handling.
IMPAIRMENT OF STRATEGIC INVESTMENT
During the quarter ended June 30, 1999, the Company recorded a $1.2 million
impairment loss on a strategic investment. The loss represented the Company's
$1 million investment for an 8% ownership interest in a small hardware vendor,
plus an additional $169,000 temporarily advanced for working capital. Greater
than one-half of the vendor's total sales were made to the Company. The
impairment was recorded due to the uncertain financial viability of the vendor
due to the Company's selection of an alternate source for the components
supplied by the vendor.
INCOME TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Income tax benefit (provision).............. $ 569 $ 39 1,359.0% $(3,695) $1,249 (395.8)%
Effective tax rate.......................... 32.7% 2.6% 29.1% 24.9%
</TABLE>
Variations in the customary relationship between the income tax benefit
(provision) and the statutory income tax rate of 34% result from certain
non-deductible 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 varying operating results and the impact of changing research and
development tax credits, tax exempt investment income, and foreign sales
corporation benefits as a percentage of taxable income. In addition, the Company
anticipates that it will fall under the jurisdiction of additional taxing
authorities as its operations expand into new geographical areas.
The Company's effective tax rates for the quarters ended December 31, 1999
and December 31, 1998 were 32.7% and 2.6%, respectively (benefit rates as a
result of pre-tax losses). During the quarter ended June 30, 1999, the Company
utilized its net operating loss (NOL) carryforward from the prior year and the
Company reversed the valuation allowance of $885,000 on deferred tax assets due
to the taxable income generated by the sale of technology assets described
above. The NOL carryforward and the reversal of the deferred tax valuation
allowance resulted in an effective tax rate of 29.1% for the nine month period
ended December 31, 1999 compared to a benefit rate of 24.9% in the comparable
prior year period.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 CHANGE 1999 1998 CHANGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share
amounts)
Net income (loss)...................... $(1,174) $(1,490) (21.2)% $8,873 $(3,805) (333.2)%
Percentage of net sales................ (5.3)% (9.0)% 14.6% (8.6)%
Earnings (loss) per share:
Basic................................ $ (0.24) $ (0.32) (25.0)% $ 1.89 $ (0.82) (330.5)%
Diluted.............................. $ (0.24) $ (0.32) (25.0)% $ 1.76 $ (0.82) (314.6)%
</TABLE>
14
<PAGE>
The net income and earnings per share for the three month period ended
December 31, 1999 in comparison to the net loss and loss per share for the
corresponding period in the prior fiscal year were primarily attributable to a
33% increase in net sales combined with an improvement in gross margin
percentage from 51.1% to 59.0%. The net income and earnings per share for the
nine month period ended December 31, 1999 in comparison to the net loss and loss
per share for the comparable prior year period were primarily due to the gain
associated with the sale of technology assets described above. In addition,
operating results before one-time items improved as revenue growth exceeded
growth in operating expenses. The numbers of common and common equivalent shares
outstanding were comparable in the three month and nine month periods ended
December 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities increased to
$15.7 million or 30% of total assets at December 31, 1999 from $4.5 million or
12% of total assets at March 31, 1999. The increase is due primarily to the
$18 million proceeds from the sale of technology during the quarter ended
June 30, 1999 and to a lesser extent, a $4 million advance received under a
borrowing agreement between the Company and a significant customer (see below).
Cash flow used in operations totaled $10.0 million during the nine months ended
December 31, 1999. The Company had net working capital of $31.9 million at
December 31, 1999.
Accounts receivable, net of allowances, decreased to $13.5 million at
December 31, 1999 from $13.6 million at March 31, 1999. The decrease in accounts
receivable balances was due primarily to improvements in collection statistics,
with days' sales outstanding improving 9% from 74 days at March 31, 1999 to
68 days at December 31, 1999. Inventory increased to $9.0 million at
December 31, 1999 from $5.9 million at March 31, 1999, as the Company secured a
large purchase of PC platforms at favorable terms in the quarter ended
December 31, 1999.
The Company made $2.6 million in capital expenditures during the nine months
ended December 31, 1999, compared to $2.2 million during the comparable period
of the prior fiscal year. Approximately $1.0 million of the additions during the
nine months ended December 31, 1999 represented the Company's investment in a
new accounting and manufacturing business system that was implemented on
July 1, 1999. The majority of the remaining capital expenditures during the nine
months ended December 31, 1999 consisted of computer hardware and software used
to augment the Company's information systems infrastructure, as well as
additions and upgrades of computer equipment for employees. The Company also
incurred capital expenditures with the improvement and expansion of its
production facilities in the quarter ended December 31, 1999. The Company
currently has no specific commitments with respect to additional capital
expenditures during the remainder of fiscal 2000, but expects to spend an
aggregate of approximately $3.2 million for the year.
The Company has a $10 million revolving credit line from a bank for
financing working capital. The line of credit is secured by the Company's
investment portfolio and expires on June 30, 2000. The Company had no borrowings
outstanding under the line of credit at December 31, 1999.
On November 5, 1999, the Company's largest customer exercised a warrant and
purchased 307,692 shares of the Company's common stock at $13.00 per share. The
customer elected to pay the exercise price by canceling the outstanding
$4.0 million balance on a related borrowing agreement. The customer retains the
right to purchase an additional 192,308 shares at $13.00 per share under the
warrant through May 5, 2002. The carrying amount of the debt, net of the
unamortized debt issuance cost, was credited to common stock as of the date of
the conversion and no gain or loss was recognized.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations, and the financing
arrangements described above will provide sufficient resources to finance its
operations for at least the next year.
15
<PAGE>
YEAR 2000 (Y2K)
An issue that has affected 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 completed its assessment
of the year 2000 readiness of its internal business process systems and
applications and crossed the January 1, 2000 milestone date without business
disruption. The Company believes that its internal systems are year 2000 ready,
but intends to continue monitoring its systems throughout the year 2000. The
Company has spent approximately $100,000 to replace or upgrade internal systems
replaced or upgraded solely to achieve year 2000 readiness, and does not
anticipate further expenditures.
The Company 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, almost all 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, the
Company is dependent on its customers to take necessary steps, and if any
customers have not or 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 four class action lawsuits, one each in
Alabama, Indiana, Massachusetts and Texas state courts, related to the alleged
inability of the Company's Replay, Replay Plus and Repartee products released
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 answers in
Alabama, Indiana and Massachusetts, and is preparing a responsive pleading in
the Texas action. 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 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 does not believe its third-party suppliers
experienced any significant disruptions as they crossed the January 1, 2000
milestone date. The Company also requested and assessed any available
information from major customers concerning their internal year 2000 readiness.
The Company does not believe its major customers experienced any significant
disruptions as they crossed the January 1, 2000 milestone date.
Assessments of the potential effects of year 2000 issues varied widely among
different consultants, commentators, economists, governments and companies, and
although the most dire predictions appear not to have come true, there is still
some risk of continuing impact. Because of this uncertainty, the Company intends
to continue its monitoring, but believes most of the risk has been avoided.
Readers are cautioned that forward looking statements contained in the Year
2000 Update should be read in conjunction with the Company's disclosures under
the following heading.
16
<PAGE>
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 marketplace, 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. New product introductions by the Company may
be delayed, resulting in lost customers or allowing competitors to gain
market share.
- 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.
- 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.
- If the Company experiences delays in shipments (whether 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 effort to move 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.
- 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Active Voice Corporation 1998 Employee
Stock Option Plan
10.2 Amended and Restated 1997 Director Stock Option Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K regarding the stock acquisition
agreement to acquire PhoneSoft Inc. on February 8, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C> <C>
ACTIVE VOICE CORPORATION
(Registrant)
By: /s/ JOSE S. DAVID
-----------------------------------------
Jose S. David
Date: February 14, 2000 CHIEF FINANCIAL OFFICER
Signing on behalf of registrant and
as principal financial officer
</TABLE>
19
<PAGE>
SECOND AMENDMENT
TO
ACTIVE VOICE CORPORATION
1998 STOCK OPTION PLAN
THIS SECOND AMENDMENT is adopted effective as of October 21, 1999 (the
"Amendment Date"), by ACTIVE VOICE CORPORATION, a Washington corporation (the
"Company").
RECITALS
A. The Company has adopted the Active Voice Corporation 1998 Stock
Option Plan (the "Plan").
B. The Plan has been amended by that First Amendment thereto, effective
as of June 22, 1999.
C. The Company desires to further amend the Plan in certain respects.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Section 4.1 of the Plan is hereby amended by substituting "one
million (1,000,000)" in place of "six hundred thousand (600,000)".
2. Except as amended hereby, the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, this Second Amendment has been executed as of the
Amendment Date.
ACTIVE VOICE CORPORATION
By /s/ Frank J. Costa
-------------------------------------
Frank J. Costa
President and Chief Executive Officer
<PAGE>
ACTIVE VOICE CORPORATION
1997 DIRECTOR STOCK OPTION PLAN
ACTIVE VOICE CORPORATION, a Washington corporation (the "Company"),
hereby establishes and sets forth the terms of the Active Voice Corporation
1997 Director Stock Option Plan (the "Plan"). The Plan was originally adopted
effective as of September 30, 1997 (the "Effective Date"); was amended and
restated effective as of June 22, 1998; was further amended effective as of
May 6, 1999; and was again amended and restated effective as of December 15,
1999.
1. DEFINITIONS. Capitalized terms used in the Plan have the meanings
given those terms in the attached Appendix A or in the section of the Plan
referenced therein.
2. PURPOSE OF PLAN. The purpose of the Plan is to assist the Company
in attracting and retaining outside directors of the highest caliber to serve
on the Board. The Plan seeks to achieve this purpose by providing for
automatic grants of Options to certain outside directors on each Annual
Meeting Date and at certain other times.
3. ADMINISTRATION OF THE PLAN. The Board shall have full power and
authority, subject only to the provisions of the Plan (a) to administer or
supervise the administration of the Plan; (b) to interpret the provisions of
the Plan and the agreements evidencing Options; (c) to correct any defect,
supply any information and reconcile any inconsistency in such manner and to
such extent as it determines to be necessary or advisable to carry out the
purpose of the Plan; and (d) to take such other actions in connection with
the Plan as it determines to be necessary or advisable. The Board is
authorized to adopt, amend and rescind such rules, regulations and procedures
not inconsistent with the provisions of the Plan as it determines to be
necessary or advisable for the proper administration of the Plan, and each
Option shall be subject to all such rules, regulations and procedures
(whether the Option was granted before or after adoption thereof). Each
action and determination made or taken by the Board, including but not
limited to any interpretation of the Plan and the agreements evidencing
Options, shall be final, conclusive and binding for all purposes and upon all
persons. The Board shall have all powers necessary or appropriate to
accomplish its duties under the Plan.
4. SHARES AVAILABLE FOR OPTIONS. The aggregate number of shares of
Common Stock reserved for issuance upon exercise of Options granted under the
Plan will be eighty-four thousand (84,000) (subject to any adjustment
required or permitted under Section 9 or Section 10), and Options may be
granted under this Plan only with respect to the shares so reserved. If an
Option terminates for any reason without having been exercised in full, the
shares of Common Stock for which the Option has not been exercised shall
again be available for purposes of the Plan.
-1-
<PAGE>
5. GRANTS OF OPTIONS
5.1 Effective October 1, 1997, each individual who has been an
Eligible Director for at least six (6) months will receive an Option (a
"Continuing Director Option") to acquire two thousand five hundred (2,500)
shares of Common Stock.
5.2 Effective on the date an individual first takes office as
an Eligible Director on the Board (an "Initial Grant Date"), the individual
will receive an Option (an "Initial Option") to acquire either (a) fifteen
thousand (15,000) shares of Common Stock, if six (6) months or less have
elapsed since the Annual Meeting Date next preceding the Initial Grant Date,
or (b) ten thousand (10,000) shares of Common Stock, if more than six (6)
months have elapsed since that Annual Meeting Date or if the individual first
takes office as an Eligible Director on an Annual Meeting Date; PROVIDED,
HOWEVER, if there are insufficient Available Shares for the grant of the
Initial Option as provided above, the individual shall instead receive an
Initial Option to acquire the remaining Available Shares.
5.3 On the Annual Meeting Date in 1998 and in each subsequent
year so long as Available Shares remain under this Plan (each such date will
be referred to as an "Annual Grant Date"), each individual who is an Eligible
Director on the Annual Grant Date will receive an Option (an "Annual Option")
to acquire five thousand (5,000) shares of Common Stock; PROVIDED, HOWEVER,
if there are insufficient Available Shares for the grant of the Annual
Options as provided above, each such Eligible Director shall instead receive
an Annual Option to acquire the largest whole number of shares of Common
Stock as can then be granted without exceeding the Available Shares.
5.4 Each grant of an Option shall occur automatically without
further action of the Board other than, to the extent necessary, its
determination of (a) the Fair Market Value on the Grant Date, and (b) any
provisions that are to be included in the agreement evidencing the Option
pursuant to Section 8.1.
6. PURCHASE PRICE. The price at which each share of Common Stock may
be purchased upon exercise of an Option shall be the Fair Market Value of the
Common Stock on the Grant Date. The purchase price shall be paid in full at
the time of exercise (a) in cash, (b) by means of a transfer to the Company
of shares of Common Stock that have been outstanding for at least one (1)
year and that have a Fair Market Value equal to the purchase price to be
paid, or (c) a combination of cash and shares of Common Stock.
7. OTHER TERMS OF OPTIONS
7.1 Each Initial Option granted to an Eligible Director will
become exercisable --
(a) for one-third (1/3) of the shares of Common Stock
covered thereby (rounded down to the nearest whole number, if necessary to
eliminate a fractional share) on the first (1st) anniversary of its Grant
Date;
-2-
<PAGE>
(b) for an additional one-third (1/3) of the shares of
Common Stock covered thereby (rounded down to the nearest whole number, if
necessary to eliminate a fractional share) on the second (2nd) anniversary of
its Grant Date; and
(c) for the remaining shares of Common Stock covered
thereby on the third (3rd) anniversary of its Grant Date.
PROVIDED, HOWEVER, the Option will not become exercisable for shares for
which it is scheduled to become exercisable on a particular anniversary date
under clause (a), (b) or (c) above if more than sixty (60) days prior to the
date when the Option is scheduled to become exercisable, the Eligible
Director ceases to be a director of the Company for any reason.
7.2 A Continuing Director Option or an Annual Option granted
to an Eligible Director will become exercisable for all of the shares of
Common Stock covered thereby on the first (1st) anniversary of its Grant
Date; PROVIDED, HOWEVER, the Option will not become exercisable if more than
sixty (60) days prior to that anniversary date, the Eligible Director ceases
to be a director of the Company for any reason other than his or her death.
7.3 If an Option does not become exercisable for shares for
which it is scheduled to become exercisable on a particular anniversary of
its Grant Date, the Option shall automatically terminate as to such shares.
After an Option becomes exercisable for any shares of Common Stock, the
Option may be exercised for such shares in whole or in part at any time and
from time to time prior to its termination pursuant to Section 7.4.
7.4 Unless it terminates earlier under other provisions of
this Plan, an Option granted to an Eligible Director will terminate ten (10)
years after its Grant Date or one (1) year after the date of death of the
Eligible Director, whichever occurs first.
8. OPTION AGREEMENT; NONTRANSFERABILITY OF OPTIONS; CERTIFICATES
8.1 Each Option will be evidenced by a written agreement
executed by the Company and the Eligible Director. Such agreement shall
contain the terms of the Option as specified in this Plan, together with such
other provisions not inconsistent with such terms as the Board deems
advisable. The written agreements executed with respect to Options granted
prior to December 15, 1999, contain provisions conditioning exercisability of
such Options on attendance by the Eligible Directors at certain meetings of
the full Board and any committee(s) of the Board of which the Eligible
Directors are members. Such provisions (but not any provisions conditioning
exercisability on continued membership on the Board) shall be void and of no
effect.
8.2 An Option will not be transferable by an Eligible Director
other than by will or by the laws of descent and distribution, will not be
involuntarily alienable by legal process or otherwise by operation of law,
and will be exercisable during the Eligible Director's lifetime only by the
Eligible Director. If an Eligible Director dies prior to full exercise of an
Option, the Option may be exercised, to the extent it does not thereby
terminate, by the person or persons to whom the rights of the Eligible
Director under the Option pass by will or by
-3-
<PAGE>
applicable laws of descent and distribution. The Company may at any time, by
written notice to the Eligible Director or to the then holder of an Option,
release in whole or in part the restrictions under this Section 8.2).
8.3 Each certificate evidencing Common Stock issued upon
exercise of an Option shall bear such legends as the Company, upon advice of
legal counsel, determines to be necessary or appropriate.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If the outstanding
shares of Common Stock are increased or decreased, or changed into or
exchanged for a different number or kind of shares or securities of the
Company through a reorganization, merger, recapitalization, reclassification,
share exchange or other material alteration in the capital structure of the
Company, an appropriate and proportionate adjustment shall be made to the
number and/or kind of shares or securities as to which Options will
thereafter automatically be granted. A corresponding adjustment shall be made
to the number and/or kind of shares or securities allocated to each Option
outstanding at the time of such event and to the purchase price of such
shares or securities; PROVIDED, HOWEVER, that such adjustment shall be made
without changing the total purchase price applicable to the unexercised
portion of the Option. For purposes of this Section 9, neither (a) the
issuance of additional shares of Common Stock or other securities of the
Company in exchange for adequate consideration (including services), nor (b)
the conversion into Common Stock of any securities of the Company now or
hereafter outstanding, shall be deemed material alterations in the capital
structure of the Company. If the Board determines that the nature of a
material alteration in the capital structure of the Company is such that it
is not feasible or advisable to make adjustments to this Plan or to the
Options granted under the Plan, such event shall be subject to Section 10.
10. OTHER SIGNIFICANT EVENTS. In the event of (a) a reorganization,
merger, recapitalization, reclassification, share exchange or other similar
event affecting the Company and one or more other corporations following
which the Company is not a surviving corporation, (b) the acquisition by any
person, partnership, or corporation of more than twenty-five percent (25%) of
the outstanding shares of Common Stock, (c) a sale of substantially all of
the assets of the Company, (d) the dissolution or liquidation of the Company,
or (e) a material change in the capital structure of the Company that is
subject to this Section 10 in accordance with the last sentence of Section 9,
all Options shall automatically become fully exercisable for all of the
shares of Common Stock covered thereby, and the Board shall have the power to
determine what other effect, if any, such event shall have upon Options
outstanding under the Plan, including but not limited to the power to cause
Options to be surrendered and canceled and payments to be made to the holders
in exchange therefor and to cause adjustments to be made in the number and/or
kind of shares or securities with respect to which such Options may be
exercised and/or in the purchase prices and other terms and conditions
thereof. Upon such event, the Plan and all Options outstanding under the Plan
shall terminate, except to the extent the Board, pursuant to its authority
under this Section 10, has made provision for the continuation of the Plan
and outstanding Options or the substitution for outstanding Options of new
options or awards covering the stock or securities
-4-
<PAGE>
of a successor entity, in which event the Plan and outstanding Options shall be
subject to the terms so provided.
11. AMENDMENT; TERMINATION
11.1 The Board may from time to time amend the Plan in any
respect whatsoever; PROVIDED, HOWEVER, that no amendment may have any material
adverse effect on the rights of any director or former director with respect to
any Option granted prior to the amendment, unless the director consents thereto.
11.2 The Board may terminate the Plan at any time. No Options
shall be granted following termination of the Plan, but the provisions of the
Plan shall continue in effect until all Options terminate or are exercised in
full and all rights of all persons with any interest in the Plan expire.
12. GOVERNING LAW. All determinations made and actions taken pursuant
hereto shall be governed by the laws of the State of Washington and construed
accordingly.
-5-
<PAGE>
APPENDIX A
DEFINITIONS
"Annual Grant Date" is defined in Section 5.3.
"Annual Option" is defined in Section 5.3.
"Annual Meeting" means an annual meeting of shareholders of the
Company.
"Annual Meeting Date" means the date of an Annual Meeting.
"Available Shares" means the number of shares of Common Stock from time
to time available under Section 4 for the grant of Options under this Plan.
"Board" means the Board of Directors of the Company.
"Common Stock" means the Common Stock, no par value, of the Company.
"Company" is defined in the preamble of the Plan.
"Continuing Director Option" is defined in Section 5.1.
"Effective Date" is defined in the preamble of the Plan.
"Eligible Director" means each individual who on a Grant Date meets the
following requirements:
(a) The individual is a member of the Board at the close of
business on the Grant Date;
(b) At no time during the calendar year in which the Grant
Date falls has the individual been an employee of the Company or any of
its direct or indirect subsidiaries; and
(c) Solely for purposes of eligibility for a grant of an
Annual Option on an Annual Option Date, if the individual was a member
of the Board prior to such Annual Option Date, during the period from
the immediately preceding Annual Option Date to such Annual Option Date
(or such portion of that period during which the individual was serving
as a member of the Board), the individual attended at least
seventy-five percent (75%) of the combined number of meetings of the
full Board and any committee(s) of the Board of which the individual
was a member, and also attended at least fifty percent (50%) of such
combined number of meetings in person (for purposes hereof, if the
Board takes action by unanimous written consent, such consent shall be
deemed to be a meeting of the Board that all directors have attended in
person).
A-1
<PAGE>
APPENDIX A
DEFINITIONS
"Fair Market Value" for the Common Stock (or any other security) on any
day means, if the Common Stock (or other security) is publicly traded, the last
sales price (or, if no last sales price is reported, the average of the high bid
and low asked prices) for a share of Common Stock (or unit of the other
security) on that day (or, if that day is not a trading day, on the next
preceding trading day), as reported by the principal exchange on which the
Common Stock (or other security) is listed, or, if the Common Stock (or other
security) is publicly traded but not listed on an exchange, as reported by The
Nasdaq Stock Market, or, if such prices or quotations are not reported by The
Nasdaq Stock Market, as reported by any other available source of prices or
quotations selected by the Committee. If the Common Stock (or other security) is
not publicly traded, or if the Fair Market Value is not determinable by any of
the foregoing means, the Fair Market Value on any day shall be determined in
good faith by the Board on the basis of such considerations as the Board deems
appropriate.
"Grant Date" means October 1, 1997, in the case of a Continuing
Director Option, and any Annual Grant Date or Initial Grant Date, in the case of
an Annual Option or an Initial Option, respectively.
"Initial Grant Date" is defined in Section 5.2.
"Initial Option" is defined in Section 5.2.
"Option" means an Annual Option, a Continuing Director Option or an
Initial Option.
"Plan" is defined in the preamble hereof.
A-2
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