<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________________ TO ___________________
COMMISSION FILE NUMBER 0-11630
INTELECT COMMUNICATIONS SYSTEMS LIMITED
(Exact Name of Company as Specified in Its Charter)
BERMUDA N/A
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS
75081
(Address of Principal Executive Offices, Zip Code)
972-367-2100
(Company's Telephone Number, Including Area Code)
-----------------------------------
Indicate by check mark whether the Company: (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
There were 23,954,978 shares of Common Stock, par value $.01 per share,
outstanding on November 4, 1997.
================================================================================
<PAGE> 2
INTELECT COMMUNICATIONS SYSTEMS LIMITED
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company 2
at September 30, 1997 (unaudited) and December 31, 1996
Consolidated Statements of Operations of the Company 3
(unaudited) for three months and nine months ended September 30, 1997
and 1996
Consolidated Statements of Cash Flows of the Company 4
(unaudited) for the nine months ended September 30, 1997 and 1996
Notes to the Consolidated Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5 OTHER INFORMATION 14
ITEM 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------- -------
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents 2,108 4,863
Marketable securities 920 854
Accounts receivable, net 12,298 2,427
Inventories, net 4,098 2,978
Prepaid expenses 671 472
------- -------
Total current assets 20,095 11,594
Property and equipment, net 5,825 4,285
Goodwill, net 13,580 14,573
Software development costs, net 2,431 1,389
Deferred financing costs, net 1,194 582
Other intangible assets, net 3,615 2,879
Other assets 648 716
------- -------
47,388 36,018
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable 9,000 --
Current maturities of long-term debt 5,688 4,125
Current installments of obligations under capital leases 81 57
Accounts payable 4,340 1,878
Accrued liabilities 3,988 3,302
Net liabilities of discontinued operations 400 400
Deferred income taxes 47 48
------- -------
Total current liabilities 23,544 9,810
Convertible debentures -- 14,913
Long-term debt, net of current maturities -- 3,238
Long-term obligations under capital leases, net of current installments 46 59
Deferred income taxes 383 267
------- -------
23,973 28,287
------- -------
Shareholders' equity:
$2.0145, 10% cumulative convertible preferred stock, series A, $.01 par
value (aggregate involuntary liquidation preference $20,145,000).
Authorized 10,000,000 shares; 4,999,992 shares issued and
outstanding in 1997 50 --
Common shares, $.01 par value. Authorized 80,000,000 shares; 22,631,160
and 15,027,728 shares issued and outstanding in 1997 and 1996 226 150
Additional paid-in capital 69,951 36,849
Unrealized gain on marketable securities 5 18
Accumulated deficit (46,817) (29,286)
------- -------
Total shareholders' equity 23,415 7,731
------- -------
47,388 36,018
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 4
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1997 1996 1997 1996
-------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues:
Products $ 8,358 181 16,869 1,579
Services 2,657 1,577 6,684 4,289
Contracts 61 157 1,067 1,335
-------- ------- ------- -------
11,076 1,915 24,620 7,203
Cost of revenues:
Products 5,159 606 11,030 1,956
Services 1,845 1,023 4,778 3,010
Contracts 137 611 1,146 3,050
-------- ------- ------- -------
7,141 2,240 16,954 8,016
-------- ------- ------- -------
Gross profit (loss) 3,935 (325) 7,666 (813)
-------- ------- ------- -------
Operating expenses:
Selling, general and administrative 4,554 4,260 13,403 10,276
Engineering and development 3,438 1,114 8,430 3,107
Amortization of goodwill 331 1,247 992 1,986
-------- ------- ------- -------
8,323 6,621 22,825 15,369
-------- ------- ------- -------
Operating loss (4,388) (6,946) (15,159) (16,182)
-------- ------- ------- -------
Other income (expense):
Interest expense (96) (459) (1,999) (626)
Interest and other 224 126 36 417
-------- ------- ------- -------
128 (333) (1,963) (209)
-------- ------- ------- -------
Loss from continuing operations before
income taxes (4,260) (7,279) (17,122) (16,391)
Income taxes (40) (1,215) (117) 1,046
-------- ------- ------- -------
Loss from continuing operations (4,300) 8,494 (17,239) 15,345
Loss on disposal of discontinued operations (178) (9) (290) (18)
======== ======= ======= =======
Net loss $ (4,478) (8,503) (17,529) (15,363)
======== ======= ======= =======
Loss per share (primary and fully diluted):
Continuing operations $ (.19) (.63) (.89) (1.14)
Discontinued operations (.01) -- (.01) --
======== ======= ======= =======
Net loss $ (.20) (.63) (.90) (1.14)
======== ======= ======= =======
Weighted average number of shares and common stock
equivalents outstanding (in thousands) 21,905 13,547 19,455 13,499
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss (17,529) (15,363)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of intangible assets 2,448 2,525
Deferred income taxes 115 (1,046)
Noncash compensation -- 500
Stock option compensation 183 380
Amortization of deferred financing costs 1,304 458
Other noncash financing costs 73 --
Noncash operating expenses 180 --
Other 8 (10)
Change in operating assets and liabilities, net of effects of
acquired companies:
Accounts receivable (9,971) (251)
Inventories (1,120) (208)
Other assets (167) (362)
Accounts payable and accrued liabilities 3,462 (24)
Net liabilities of discontinued operations -- (76)
------- -------
Net cash used in operating activities (21,014) (13,477)
------- -------
Cash flows from investing activities:
Purchase of other intangible assets (94) --
Capital expenditures (2,480) (3,283)
Proceeds on sale of fixed assets -- 57
Purchase of marketable securities (78) (55)
Payments for other assets -- (1,582)
Software development costs (1,317) (3,392)
Payment for acquisition of DNA, net of cash acquired -- (3,010)
Loan receivable -- 600
Payment for acquisition of IVC, net of cash acquired -- (2,004)
------- -------
Net cash used in investing activities (3,969) (12,669)
------- -------
</TABLE>
(Continued)
4
<PAGE> 6
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Debt issuance costs (255) --
Proceeds from issuance of notes payable 14,200 --
Proceeds from issuance of convertible debentures -- 13,799
Payments of principal on capital lease obligations (43) (84)
Payments of long-term debt (122)
Payments on notes payable (1,875) (880)
Proceeds from issuance of common shares 3,307 2,473
Net Proceeds from issuance of preferred stock 4,911 --
Exercise of warrants 1,620 --
Exercise of employee stock options 363
------- -------
Net cash provided by financing activities 22,228 15,186
------- -------
Net decrease in cash and cash equivalents (2,755) (10,960)
Cash and cash equivalents, beginning of period 4,863 15,039
======= =======
Cash and cash equivalents, end of period 2,108 4,079
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited consolidated financial statements included in the Company's
Annual Report on Form 10-K as at December 31, 1996.
INVENTORIES
The components of inventories are as follows (thousands of Dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----- -----
<S> <C> <C>
Raw materials 4,476 2,727
Work in progress 263 292
Finished goods 539 1,213
----- -----
5,278 4,232
Less: allowance for obsolescence 1,180 1,254
===== =====
4,098 2,978
===== =====
</TABLE>
FINANCING MATTERS
The Company executed a loan agreement on May 8, 1997 (the "Original
Loan Agreement") with the Coastal Corporation Second Pension Trust (the
"Coastal Trust") pursuant to which the Company borrowed $5,000,000, and the
Coastal Trust purchased $5,000,000 of the Company's Cumulative Convertible
Preferred Stock (the "Preferred Stock"). On May 30, 1997, $3,500,000 of the
borrowing, including accrued interest of $35,000 was converted into 1,737,404
shares of Preferred Stock and on August 27, 1997, the Coastal Trust converted
the remaining borrowing of $1,572,000, including accrued interest of $37,000
into an additional 780,583 shares of Preferred Stock at the conversion price of
$2.0145 per share, as provided in the Original Loan Agreement. Also on August
27, 1997, the Coastal Trust and the Company amended and restated the Original
Loan Agreement (the "Amended and Restated Loan Agreement") to provide for new
borrowing on a revolving basis, of up to $5,000,000. Borrowings under the
Amended and Restated Loan Agreement bear interest at 2% over prime, mature on
March 27, 1998, and are secured by all outstanding shares of the Company's
subsidiaries. Pursuant to the terms of the Amended and Restated Loan Agreement,
the Coastal Trust advanced $3,000,000. Outstanding advances are convertible at
any time, at either party's request, at $6.18375 per share, into a new series
of preferred stock with the same rights and preferences as the existing series
of preferred stock. In connection with the advance, the Company issued to the
Coastal Trust a warrant to purchase 450,000 Common Shares, at $6.00 per share,
exercisable at any time until August 26, 2002. The fair value of the warrant at
date of issuance, totaling $987,000, was credited to additional paid-in capital
and is being charged to interest expense using the effective interest method
over the loan period.
Effective on July 2, 1997, in conjunction with a consulting agreement,
the Company issued a warrant to purchase 30,000 Common Shares, at $4.50 per
share, exercisable at any time after August 30, 1997 until December 31, 2001.
The fair value of the warrant at date of issuance, totaling $43,000, was
credited to additional paid-in capital and charged to other financing costs. On
September 26, 1997, the warrant was exercised. The Company received $135,000 in
net proceeds.
6
<PAGE> 8
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
SEPTEMBER 30, 1997
On August 1, 1997, the Coastal Trust exercised a warrant for 750,000
Common Shares which had been issued pursuant to the Original Loan Agreement
resulting in $1,485,000 in net proceeds to the Company.
On August 22 and 29, 1997, the Company issued 60,000 and 636,400
Common Shares, respectively, in private placement transactions to accredited
investors, including 21,400 shares issued as payment for placement services,
resulting in $3,307,000 in net proceeds to the Company.
On June 19, 1997, in conjunction with a product distribution
agreement, the Company agreed to issue warrants to purchase up to 270,000
Common Shares at $3.6312 per share in increments of 6,750 shares for each
$1,000,000 of sales attributable to the distributor on or before June 19, 2001,
exercisable at any time after issuance until June 19, 2004. As of September 30,
1997, warrants had been issued to purchase 40,500 Common Shares and additional
warrants to purchase 20,250 Common Shares have been issued subsequent to
September 30, 1997. As of September 30, 1997, the fair value of warrants at
issuance, totaling $162,000, was credited to additional paid-in capital and
charged to operating expense.
REVISION OF ESTIMATE REGARDING WARRANT VALUATION
The Company determined that the estimated life of warrants used when
calculating their value under the Black-Scholes method should be revised. The
net effect was to reduce by $775,000 the otherwise reportable interest and other
financing costs in the three month period ending September 30, 1997.
RECENT PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share," which supersedes APB Opinion No. 15, "Earnings per
Share," was issued in February 1997. SFAS 128 requires dual presentation of
basic and diluted earnings per share ("EPS") for complex capital structures on
the face of the statement of operations. Basic EPS is computed by dividing
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options. SFAS 128 is
required to be adopted for financial statements issued for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted. After adoption, all prior period data presented will be restated to
conform with SFAS 128. The Company does not expect that basic and diluted EPS
measured under SFAS 128 will be materially different from the current
presentation of primary and fully-diluted loss per common share measured under
APB Opinion No. 15. The Company will present both EPS measures on the face of
the statement of operations.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information About Capital Structure," was issued in February 1997. The Company
does not expect the statement to result in any substantive change in its
disclosure.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and SFAS 131 "Disclosures About Segments of an Enterprise
and Related Information" were issued in June 1997. The impact these
pronouncements may have on the Company's disclosures is being evaluated.
SUBSEQUENT EVENTS
In March 1997, Peter G. Leighton, former president of the Company, and
Rhianon M. Pedro, former vice president of the Company, initiated actions
against the Company seeking damages related to their separations from the
Company. In October 1997, the actions were settled on terms favorable to the
Company. All parties executed mutual releases of lawsuit claims and
counterclaims which were dismissed with prejudice. In concert with the
settlement, Mr.
7
<PAGE> 9
Leighton and Ms. Pedro exercised their stock options acquiring, respectively,
305,000 and 50,000 Common Shares under the Company's stock option plans. Total
proceeds received by the Company were $1,761,000.
On October 7, 1997, the Coastal Trust, holder of 4,999,992 shares of
Preferred Stock, converted 780,583 shares of Preferred Stock to a like number
of Common Shares.
On October 9, 1997, the Company issued 150,000 Common Shares upon the
exercise of a warrant issued to St. James Capital Corp. dated April 24, 1997.
The warrant was issued to St. James Capital Corp. in connection with a credit
facility provided by St. James Capital Corp. to the Company. The Company
received net proceeds of $300,000 from the exercise.
On October 13, 1997, the Company authorized the issuance of 28,148
Common Shares in lieu of payment of a cash dividend on the Preferred Stock held
by the Coastal Trust from issue date through September 30, 1997. Holders of the
Preferred Stock are entitled to cumulative cash dividends at the rate of
$.20145 per annum per share, payable quarterly, commencing September 30, 1997.
The Company elected to exercise its right to pay such dividends in Common
Shares at the average closing market bid price for the five (5) consecutive
trading days prior to September 30, 1997.
As described in note 8 to the Consolidated Financial Statements
contained in the Company's Form 10-K for the fiscal year ending December 31,
1996, the Company has been in dispute with the licensor of certain video
conferencing technology. On November 6, 1997, the company executed an amended
technology license agreement with the licensor in settlement of the dispute. As
a result of such settlement, the Company is released from paying a disputed
obligation of $2,550,000 under the original license agreement. As part of such
settlement, the Company is required to pay $150,000 to the licensor for accrued
and future minimum royalties. Further royalty payments, if any, will be
contingent on actual sales of certain defined products which are based upon the
licensor's technology, which products do not include the LANscape 2.0
wavelet-based video communications product line. In concert with the
extinguishment of the $2,550,000 liability to the licensor, an intangible asset
of identical value will be written off.
8
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997
NET REVENUES
Net revenue for the three months and nine months ended September 30,
1997 increased 478% and 242%, respectively, over the prior year periods. The
product sales increase was due to the emergence and growth of the SONETLYNX
product line, of which $8,269,000 and $16,421,000, respectively, were sold,
compared to $225,000 in the prior year periods. Service revenue increased by
46% and 49%, respectively, due to the growth of the technology and engineering
services business of DNA Enterprises, Inc. ("DNA") acquired on February 13,
1996. Contract revenues decreased due to the completion of an S4 system without
significant new business in the last three months.
GROSS PROFIT
Gross profit was attributable to revenue sources as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Products 3,337 (426) 5,838 (378)
Services 807 554 1,906 1,279
Contracts (209) (453) (78) (1,714)
------ ------ ------ ------
3,935 (325) 7,666 (813)
</TABLE>
Gross profit increased over the prior year by $4,260,000 and
$8,479,000 in the three month and nine month periods, respectively. Gross
profit attributable to products improved due to increased SONETLYNX volume in
both time periods. Services margins improved because the engineering services
business of DNA was the primary constituent of the business category in 1997,
and DNA activity expanded from year to year. While improved from the prior
year, contracts margin was reduced in the three month period due to one-time
costs of the first delivery of a new universal console design to an air traffic
control customer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling expenses increased to $3,014,000 from $1,828,000 in the three
months and to $8,026,000 from $4,006,000 in the nine months ended September 30,
1997. Selling expenses in the three months included $1,872,000 to promote and
secure orders for SONETLYNX products, and $700,000 to increase awareness of and
secure beta sites for the Company's videoconferencing product.
General and administrative (G&A) expenses compared to the prior year
decreased to $1,540,000 from $2,432,000 in the three months and to $5,377,000
from $6,270,000 in the nine months ended September 30, 1997. Included in the
three month period were $774,000 of corporate expenses, up from $541,000 in the
second quarter, due to increased general legal expenses. In the three month
period, $370,000 of expense supported the Company's principal manufacturing
operations, $284,000 supported the engineering services business, and $112,000
was spent in connection with the videoconferencing business. In total, G&A
expenses for the three month period decreased 7% from the prior three month
period.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
E&D expenses increased to $3,438,000 and $8,430,000 in the three month
and nine month periods from $1,114,000 and $3,107,000 in the prior year
periods. Combining $296,000 of capitalized software development costs with E&D
expense, total spending for product development increased 37% to $3,734,000
compared to $2,735,000 in the three months ended September 30, 1996. Of these
amounts, SONETLYNX increased to $1,697,000 from $781,000, CS4 spending was
reduced to $848,000 from $1,702,000, videoconferencing product development
costs
9
<PAGE> 11
increased to $571,000 from $207,000, and DSP and S4 development spending
increased to $618,000 from $45,000. For the nine month periods, combined
capitalized software and E&D expense increased 50%.
During the third quarter, the SONETLYNX product line was expanded by
the release of a video interface which can be easily upgraded from OC-1 to
OC-3. A Network Management System was first deployed with connectability to the
public network and with a capacity for multiple SONET rings. Interfaces for
synchronization and timing from public or internal sources were demonstrated.
Interoperability of payload and overhead was achieved with a major vendor of
OC-3 equipment.
CS4 development activity consisted of performance optimization of the
prototype, stress testing, and redesign for cost reduction and to accommodate a
new processor.
Video conferencing development work led to the release of LANscape
2.0, a replacement product based on wavelet technology, with industry-leading
image and sound quality and economy in the use of bandwidth.
Spending in support of the S4 product line consisted of the completion
of universal console development.
The total spending on all E&D projects in the third quarter included
approximately $500,000 of extraordinary costs, principally for the benefit of
the videoconferencing and S4 products.
INTEREST EXPENSE
Interest expense in the three month and nine month periods of 1997
includes $290,000 and $695,000 of cash interest principally on the convertible
debentures, the St. James Credit Facility and the Coastal Trust financing.
Interest expense in the prior year was attributable to short-term indebtedness
which has been repaid. Non-cash expenses in 1997 consisted of $582,000
allocated to beneficial conversion features of the convertible debentures
issued in 1996; ($194,000) and $722,000 in the three months and nine months,
respectively, of amortized deferred financing costs in connection with the St.
James Credit Facility and the Coastal Trust financing executed in 1997; and
$73,000 in other financing costs in 1997. The amount of non-cash expense
reported in the three month period reflects the consequences of a revised
estimate of the life of warrants when calculating their value using the
Black-Scholes method. See Notes to Consolidated Financial Statements.
BACKLOG
The Company's backlog of orders increased to $8,914,000 at September
30, 1997, from $3,632,000 at December 31, 1996. Substantially all the September
30, 1997, backlog was scheduled for delivery by year end. Of this amount,
$6,563,000 was for SONETLYNX product.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 1997, cash used in operations
($21,014,000) and by investing activities ($3,969,000) was funded by $2,755,000
of available cash balances and by securing new financing, including warrant and
stock option exercises, of $22,228,000. Working capital is negative due to (i)
borrowing under the St. James Credit Facility and the Coastal Trust financing
net of redemptions, and (ii) progression of certain long-term debt items to
current status.
Operating Activities
Net cash used in operations was $21,014,000 in the nine months ended
September 30, 1997, consisting primarily of: (i) product development expenses
of $3,438,000, the majority of which did not contribute to current period
sales, (ii) sales and marketing expenses of $8,026,000 primarily of a market
development nature and (iii) an operating cost structure which could support a
higher level of sales as indicated by approximately $1,252,000 of under-applied
overhead, all of which resulted in an operating loss. In addition, $9,971,000
was used to increase accounts receivable and $1,120,000 was used to increase
inventory. These uses were partly offset by a $3,462,000 increase in accounts
payable.
10
<PAGE> 12
The Company maintained these levels of expenditure because (i) the
product developments were directed at markets believed to have very large
growth potential and (ii) recent sales experience and production growth
opportunities appeared to justify investment to stimulate the sales and prepare
for production. The revenue increases in the nine months met the Company's
expectations, and backlog is at a level consistent with near-term growth plans.
The increase in receivables was caused primarily by shipments timed near the
end of the period.
Investing Activities
Investment spending included fixed asset expenditures of $2,480,000,
of which $402,000 was for software and equipment to support CS4 development,
$928,000 was for equipment to support engineering and operations growth for
SONETLYNX products, and $312,000 was for equipment and software to support
growth of the engineering services business. Software development costs for
SONETLYNX were capitalized in the amount of $1,317,000.
Financing Activities
On August 1, 1997, the Coastal Trust exercised a warrant for 750,000
Common Shares which was originally issued to the Coastal Trust on May 8, 1997,
in connection with the Original Loan Agreement. Upon the exercise of such
warrants, the Company received $1,485,000 in net proceeds. See Notes to
Consolidated Financial Statements.
On August 22, 1997 and August 29, 1997, the Company issued, in
separate private placement transactions, 60,000 and 636,400 Common Shares,
respectively, and the Company received net proceeds from such sales of $270,000
and $3,037,000, respectively. See Notes to Consolidated Financial Statements.
On August 27, 1997, the Coastal Trust converted the then outstanding
balance of principal and interest under the Original Loan Agreement, in the
amount of $1,572,000, into 780,583 shares of Preferred Stock. Also on August
27, 1997, the Company and the Coastal Trust amended and restated the Original
Loan Agreement to enable the Company to borrow, on a revolving credit basis, up
to $5,000,000. On August 27, 1997, the Company borrowed $3,000,000 under the
Amended and Restated Loan Agreement. See Notes to Consolidated Financial
Statements.
On October 2, 1997, the holder of a warrant for 30,000 Common Shares,
exercised the warrant and the Company received $135,000 in net proceeds. See
Notes to Consolidated Financial Statements.
Outlook and Financial Strategy
The Company's outlook continues to anticipate expanding working
capital requirements and ongoing expenditures for new product and technology
development, marketing and sales programs. Internal cash generation from
operations is not expected to be sufficient to meet all such requirements until
during the 1998 timeframe. The Company's financial strategy is to continue to
utilize external sources of financing to provide funding for net capital
requirements.
External financing totaled $22,228,000 during the nine months ended
September 30, 1997, and was used primarily for expenditures and investments
described above.
On November 6, 1997, the Company executed an amended technology
license agreement in connection with videoconferencing technology, pursuant to
which a disputed obligation to pay $2,550,000 was replaced with an immediate
payment of $150,000 for accrued and future minimum royalties. Future royalty
payments, if any, will be contingent on actual sales of defined products, which
defined products do not include the LANscape 2.0 product line. See Notes to
Consolidated Financial Statements.
At September 30, 1997, operating sources of liquidity included
unrestricted cash balances of $2,108,000 and accounts receivable of
$12,298,000. The Company presently believes the receivables level is higher
than required by the amount of sales in the three month period ended September
30, 1997. The high level was caused by the concentration of sales in September.
11
<PAGE> 13
The Company continues to develop its CS4 intelligent service platform
for applications in telecommunications networks. To date, the work has been
entirely self-funded. The Company is reviewing potential corporate partners to
facilitate funding as well as marketing of the product. Presently, the review
includes discussion with a major telecommunications company regarding the
possibility of forming an alliance to finish development and to market the CS4
product. The possibility of engagement with other partners has not been
foreclosed. Any funding from such a source would likely be accompanied by an
upward revision in planned expenses so that market entry could be accelerated.
Funding by the proposed partnering process would be in addition to sources of
liquidity discussed above.
Conclusion
Considering the financing resources available and potentially
available, the outlook for cash available from customer collections, the
outlook for cash uses in operations and investing, and the options available to
reduce spending, the Company believes it has the financial resources to meet
its business requirements through the current year. There can be no assurance,
however, that the proposed financings or the business results assumed in the
Company's financial plans will be realized.
CONTINGENT LIABILITIES
In March 1997, Peter G. Leighton, former president of the Company, and
Rhianon M. Pedro, former vice president of the Company, initiated actions
against the Company seeking damages related to their separations from the
Company. In October 1997, the actions were settled on terms favorable to the
Company. All parties executed mutual releases of lawsuit claims and
counterclaims which were dismissed with prejudice. In concert with the
settlement, Mr. Leighton and Ms. Pedro exercised their stock options acquiring,
respectively, 305,000 and 50,000 Common Shares under the Company's stock option
plans. Total proceeds received by the Company were $1,761,000.
As discussed in "ITEM 3, Legal Proceedings" in the Company's Annual
Report on Form 10-K, the Company is exposed to certain contingent liabilities
which, if resolved adversely to the Company, would adversely affect its
liquidity, its results of operations and/or its financial position.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE LIQUIDITY AND OPERATING RESULTS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual events and
results could differ materially from those set forth in the forward-looking
statements. In particular, the recent growth in production and sales may not be
sustained if materials (including those supplied from sole sources) are not
available, the sales force does not identify new customers, the Company's
credit condition inhibits major customers, or new SONETLYNX and
videoconferencing product developments are delayed. The Company has made
commitments to significant amounts of spending for product development, sales
and marketing activity, and manufacturing capacity predicated on a high rate of
sales growth each quarter. If the rate of sales growth is not sustained,
certain of the expenses will not be sufficiently controllable in the short term
to avoid a negative cash flow impact. There can be no assurance that the
currently high level of credit quality among the Company's customers can be
sustained or that integration of new products will proceed without
extraordinary delays. Accordingly, customer collections may not achieve
expectations. In order to meet increasing levels of demand for manufactured
products, the Company must make estimates of future orders with enough
precision to insure the availability of certain components with long lead
times. Any inaccuracy in such estimates could affect the expected operating
results. In general, there can be no assurance that component parts will be
available in sufficient quantity and on suitable credit terms to support the
planned growth in production rates. External business conditions may also
contribute risk, especially the rate at which telecommunications companies
adopt certain new products and the demand for engineering design services which
are contingent on the development budgets of others. Potential sources of funds
include uncertainties, namely, trade credit may not become available to the
extent required to support production increases, alternative external sources
of financing may not be secured in a timely manner or on terms acceptable to
the Company or at all, availability of external sources may be affected by
general market price volatility, and partner funding of CS4 development may not
be secured soon enough to avoid development delays or to provide expense
relief. The Company's ability to raise funds from external sources may be
restricted by adverse resolution of legal proceedings discussed in Contingent
Liabilities.
12
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
(c) Recent sales of unregistered securities
Effective on July 2, 1997, the Company issued to Lifeline Industries,
Inc. ("Lifeline") a warrant to purchase 30,000 Common Shares, exercisable at an
exercise price of $4.50 per share, expiring on December 31, 2001. The warrant
was issued as compensation for consulting services. On September 26, 1997,
Lifeline exercised such warrant and the Company issued 30,000 Common Shares to
Lifeline upon such exercise. The Company issued such Common Shares in reliance
on an exemption from registration specified under Section 4(2) of the
Securities Act of 1933, as amended.
On August 1, 1997, the Company issued 750,000 Common Shares to the
Coastal Trust upon exercise of a warrant dated May 7, 1997, which warrant was
issued pursuant to the Original Loan Agreement. See Notes to Consolidated
Financial Statements. In issuing such Common Shares upon exercise of the
warrant, the Company relied on an exemption from registration specified under
Section 4(2) of the Securities Act of 1993, as amended.
On August 22, 1997, the Company issued in a private placement
transaction 30,000 Common Shares to Isaac Arnold, Jr., 10,000 Common Shares to
Arnold Corporation, and 20,000 Common Shares to the Meridian Fund, Ltd.,
pursuant to the terms of Subscription Agreements dated August 22, 1997. In
issuing such Common Shares, the Company relied on exemptions from registration
specified under Section 4(2) of the Securities Act of 1993, as amended.
Pursuant to the terms of a Settlement Agreement dated August 22, 1997,
the Company issued 993,023 Common Shares to Infinity Investors, Ltd.
("Infinity"), 160,116 Common Shares to Seacrest Capital Limited ("Seacrest"),
and 430,000 Common Shares to Zug Investments, each in settlement of a dispute
arising under and in conversion of those certain Series A and Series B
Convertible Debentures issued by the Company to Infinity and Seacrest dated
October 15, 1996. See "Item 5, Other Information." In issuing such Common
Shares, the Company relied on an exemption from registration specified under
Section 4(2)of the Securities Act of 1933, as amended.
On August 27, 1997, the Company issued to the Coastal Trust 780,583
shares of Preferred Stock, which Preferred Stock was issued upon conversion of
$1,572,000 of debt to equity pursuant to the Original Loan Agreement. On
October 7, 1997, the Company issued 780,583 Common Shares upon the conversion
of the Preferred Stock issued to Coastal Trust on August 27, 1997. See Notes to
Consolidated Financial Statements. In issuing such Preferred Stock and the
Common Shares issued upon conversion of the Preferred Stock, the Company relied
on an exemption from registration specified under Section 4(2) of the
Securities Act of 1933, as amended.
On August 29, 1997 the Company issued 636,400 Common Shares in a
private placement transaction to certain accredited investors, 615,000 of such
Common Shares being issuable pursuant to certain Subscription Agreements dated
August 29, 1997, and 21,400 being issued to the selling agent in such
transaction as part of such selling agent's fee. In issuing such shares, the
Company relied on the exemption from registration under Regulation D
promulgated under the Securities Act of 1933, as amended.
On October 9, 1997, the Company issued 150,000 Common Shares upon the
exercise of a warrant issued to St. James Capital Corp. dated April 24, 1997.
In issuing such Common Shares, the Company relied on an exemption from
registration specified under Section 4(2) of the Securities Act of 1933, as
amended.
On October 13, 1997, the Company authorized the issuance of 28,148
Common Shares in lieu of payment of the initial cash dividend on the Company's
Preferred Stock held by the Coastal Trust for the period from issue date
through September 30, 1997. See Notes to Consolidated Financial Statements. In
issuing such shares, the Company relied on an exemption from registration
specified under Section 4(2) of the Securities Act of 1933, as amended.
13
<PAGE> 15
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 13, 1997, the Company held its Annual General Meeting of
Shareholders (the "General Meeting"). At such General Meeting, the shareholders
elected directors, fixed the maximum number of directors, increased the number
of Common Shares available for use under the Company's stock incentive plan,
and approved the appointment of independent auditors.
Messrs. Herman M. Frietsch and Philip P. Sudan, Jr. were both elected
at the General Meeting as directors of the Company to hold such offices until
the third annual meeting following the General Meeting. The shareholders vote
was, as to Mr. Frietsch, 16,478,042 for, 142,133 against, and no abstentions,
and as to Mr. Sudan, 16,480,256 for, 139,919 against, and no abstentions.
Continuing to hold offices as directors of the Company after the General
Meeting, in addition to those elected at the General Meeting, were Messrs.
Anton Liechtenstein and Robert E. Garrison II, whose terms expire at the annual
general meetings in 1999 and 1998, respectively.
The number of directors' seats on the Board of Directors was fixed at
five (5) by the shareholders by a vote of 16,165,594 for, 107,515 against, and
347,066 abstentions. In accordance with Section 4.01 of the Company's Bye-Laws,
the shareholders are permitted to fix the number of directors, such number
having been previously fixed at five (5). Because only two of the director
seats expired at the General Meeting, it was proposed that the shareholders
elect two directors to fill the vacancies created by the expiry of the terms of
two of the directors and that, pursuant to the Company's Bye-Laws, the Board of
Directors intended to subsequently fill the vacancy when a suitable candidate
was located.
An amendment to the Company's stock incentive plan (the "Plan") to
increase by one million the number of Common Shares issuable under the Plan
from 3,000,000 to 4,000,000 was approved by the shareholders by a vote of
14,731,704 for, 902,084 against, 272,176 abstentions, and 714,211 broker
non-votes. The purposes of the Plan have been and continue to be to enable the
Company and its subsidiaries to attract and retain directors and key employees,
to provide them with strong incentive to advance the interests of the Company,
and to otherwise align the interests of management more closely with that of
the Company and its shareholders.
The appointment of Arthur Andersen LLP to act as independent auditors
of the Company for the 1997 fiscal year was approved by the shareholders by a
vote of 16,411,469 for, 53,775 against, and 154,931 abstentions. The Board of
Directors, in accordance with the recommendation of its Audit Committee, which
is composed of non-employees of the Company, requested, subject to shareholder
approval, that Arthur Andersen LLP act as independent auditors of the Company
for the 1997 fiscal year, replacing the firm of KPMG Peat Marwick, Chartered
Accountants, Hamilton, Bermuda whose term as independent auditors for the
Company expired at the General Meeting.
ITEM 5 - OTHER INFORMATION
On November 6, 1997, the Company executed an amended technology
license agreement in connection with videoconferencing technology, pursuant to
which a disputed obligation to pay $2,550,000 was replaced with an immediate
payment of $150,000 for accrued and future minimum royalties. Future royalty
payments, if any, will be contingent on actual sales of defined products, which
defined products do not include the LANscape 2.0 product line. See Notes to
Consolidated Financial Statements.
On August 22, 1997, the Company finalized a Settlement Agreement with
Infinity Investors Ltd. ("Infinity"), and Seacrest Capital Limited ("Seacrest")
in settlement of disputes arising under those certain Series A and Series B
Convertible Debentures issued by the Company to Infinity and Seacrest dated
October 15, 1996 (the "October Debentures"). The finalized Settlement Agreement
superseded the Term Sheet previously entered into by the parties dated June 30,
1997. Pursuant to the finalized Settlement Agreement, the disputed principal
balance of $4,114,000 of the October Debentures was converted into an aggregate
of 1,583,139 Common Shares of the Company, and the October Debentures were
cancelled.
14
<PAGE> 16
ITEM 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The Financial Statements and Financial Statement Schedules filed
as part of this report are listed and indexed on Page 1. Schedules other than
those listed in the index have been omitted because they are not applicable or
the required information has been included elsewhere in this report.
(b) Listed below are all Exhibits filed as part of this report.
Certain Exhibits are incorporated by reference to documents previously filed by
the Company with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended.
Exhibit No. Exhibit
10.1 Settlement Agreement dated August 22, 1997 among the
Company, Infinity Investors Ltd., and Seacrest Capital
Limited (2)
10.2 Subscription Agreements dated August 22, 1997 among the
Company and Isaac Arnold, Jr., Arnold Corporation, and
Meridian Fund, Ltd. (2)
10.3 Loan Agreement dated May 8, 1997 among the Company, Intelect
Systems Corp, and The Coastal Corporation Second Pension
Trust (1)
10.4 Registration Rights Agreements dated May 8 and May 30, 1997
among the Company and The Coastal Corporation Second
Pension Trust (1)
10.5 Warrant to purchase Company Common Stock expiring May 7,
2002 issued to The Coastal Corporation Second Pension Trust
(1)
10.6 Subscription Agreement dated May 30, 1997 among the Company
and The Coastal Corporation Second Pension Trust (1)
10.7 Amended and Restated Loan Agreement dated August 27, 1997
among the Company, Intelect Systems Corp, and The Coastal
Corporation Second Pension Trust (2)
10.8 Warrant to purchase Company Common Stock expiring August 26,
2002 issued to The Coastal Corporation Second Pension Trust
(2)
10.9 Warrant to purchase Company Common Stock dated April 24,
1997 issued to St. James Capital Corp. (2)
10.10 Subscription Agreements dated August 1997 among the Company
and Blake C. Davenport, Fernhill Partners, Fiftieth &
Grover Shopping Center, Carol Filler (James), Douglas
Floren, Richard A. Gray, Alexander Greenberg, Philip
Hempleman, David May, Timothy McCollum, Frank Lyon Polk
III, Sanford Prater, Privet Row, Inc., Leonard Rauner,
Marcus R. Rowan, TCM Partners, L.P., and Wayne Wilkey (2)
10.11 Warrant to purchase Company Common Shares expiring
December 31, 2001 issued to Lifeline Industries, Inc. (2)
10.12 Amended License Agreement between Digital Equipment
Corporation and Intelect Visual Communications Corp. dated
effective November 6, 1997
11.0 Statement re computation of per share earnings
27.0 Financial data schedule
- --------------------------------
(1) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 1997
(2) Incorporated herein by reference to the Registrant's Form S-3 (File No.
333-35841)
(c) Reports on Form 8-K: the Company filed on August 13, 1997 a report
on Form 8-K, reporting changes in the Company's certifying accountant.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
(Company)
Date: November 12, 1997 By: /s/ EDWIN J. DUCAYET, JR.
----------------------- --------------------------------------
Edwin J. Ducayet, Jr.
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: November 12, 1997 By: /s/ HERMAN M. FRIETSCH
----------------------- --------------------------------------
Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
16
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Definition
- ----------- ----------
<S> <C>
10.1 Settlement Agreement dated August 22, 1997 among the
Company, Infinity Investors Ltd., and Seacrest Capital
Limited (2)
10.2 Subscription Agreements dated August 22, 1997 among the
Company and Isaac Arnold, Jr., Arnold Corporation, and
Meridian Fund, Ltd. (2)
10.3 Loan Agreement dated May 8, 1997 among the Company, Intelect
Systems Corp, and The Coastal Corporation Second Pension
Trust (1)
10.4 Registration Rights Agreements dated May 8 and May 30, 1997
among the Company and The Coastal Corporation Second
Pension Trust (1)
10.5 Warrant to purchase Company Common Stock expiring May 7,
2002 issued to The Coastal Corporation Second Pension Trust
(1)
10.6 Subscription Agreement dated May 30, 1997 among the Company
and The Coastal Corporation Second Pension Trust (1)
10.7 Amended and Restated Loan Agreement dated August 27, 1997
among the Company, Intelect Systems Corp, and The Coastal
Corporation Second Pension Trust (2)
10.8 Warrant to purchase Company Common Stock expiring August 26,
2002 issued to The Coastal Corporation Second Pension Trust
(2)
10.9 Warrant to purchase Company Common Stock dated April 24,
1997 issued to St. James Capital Corp. (2)
10.10 Subscription Agreements dated August 1997 among the Company
and Blake C. Davenport, Fernhill Partners, Fiftieth &
Grover Shopping Center, Carol Filler (James), Douglas
Floren, Richard A. Gray, Alexander Greenberg, Philip
Hempleman, David May, Timothy McCollum, Frank Lyon Polk
III, Sanford Prater, Privet Row, Inc., Leonard Rauner,
Marcus R. Rowan, TCM Partners, L.P., and Wayne Wilkey (2)
10.11 Warrant to purchase Company Common Shares expiring
December 31, 2001 issued to Lifeline Industries, Inc. (2)
10.12 Amended License Agreement between Digital Equipment
Corporation and Intelect Visual Communications Corp. dated
effective November 6, 1997
11.0 Statement re computation of per share earnings
27.0 Financial data schedule
</TABLE>
- --------------------------------
(1) Incorporated herein by reference to the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 1997
(2) Incorporated herein by reference to the Registrant's Form S-3 (File No.
333-35841)
<PAGE> 1
EXHIBIT 10.12
AMENDED
LICENSE AGREEMENT
between
DIGITAL EQUIPMENT CORPORATION
and
INTELECT VISUAL COMMUNICATIONS CORP.
Formerly Known As Mosaic Information Technologies
for
VIDEO CONFERENCING TECHNOLOGY
AGREEMENT # QR-CLDD2-23
-------------------------------
EFFECTIVE DATE
November 6, 1997
-------------------------------
(On the Date of Last Signature)
DIGITAL CONFIDENTIAL 1 NOVEMBER 5, 1997
<PAGE> 2
TABLE OF CONTENTS
RECITALS
ARTICLE 1: RESOLUTION OF DISPUTES
AMENDED CONTINUING LICENSE TERMS
ARTICLE 2: DEFINITIONS
ARTICLE 3: TITLE AND LICENSE GRANTS
ARTICLE 4: CONFIDENTIALITY
ARTICLE 5: TECHNICAL ASSISTANCE
ARTICLE 6: ROYALTY PAYMENTS
ARTICLE 7: PAYMENT, REPORTS AND RECORDS
ARTICLE 8: DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY
ARTICLE 9: INDEMNITY
ARTICLE 10: TERM AND TERMINATION
ARTICLE 11: PUBLICITY
ARTICLE 12: REPRESENTATIONS AND UNDERSTANDINGS
ARTICLE 13: GENERAL
APPENDIX A: DESCRIPTION OF LICENSED TECHNOLOGY
APPENDIX B: DEFINITION OF IVC LICENSED PRODUCT(S)
APPENDIX C: LEGAL REQUIREMENTS FOR END USER AGREEMENTS
APPENDIX D: FORMAT OF PAYMENT REPORT
DIGITAL CONFIDENTIAL 2 NOVEMBER 5, 1997
<PAGE> 3
AMENDED
LICENSE AGREEMENT
between
DIGITAL EQUIPMENT CORPORATION
and
INTELECT VISUAL COMMUNICATIONS CORP.
Formerly Known As Mosaic Information Technologies, Inc.
This AMENDED LICENSE AGREEMENT, dated and effective on the date of the last
signature noted on the Signature Page (the "EFFECTIVE DATE") is entered into by
and between Digital Equipment Corporation, a Massachusetts corporation with
principal offices at 111 Powdermill Road, Maynard, Massachusetts, 01754
("DIGITAL"), and Intelect Visual Communications Corp., a Delaware corporation,
with offices at 1100 Executive Drive, Richardson , Texas 75081 and formerly
known as Mosaic Information Technologies ("IVC").
RECITALS
DIGITAL and Mosaic Information Technologies entered into a License Agreement
dated as of June 13, 1996 with respect to certain DIGITAL proprietary video
conferencing technology ( the "ORIGINAL LICENSE AGREEMENT"); and
Mosaic Information Technologies was acquired and merged into IVC; and
Disputes have arisen between DIGITAL and IVC with respect to the negotiation of
the ORIGINAL LICENSE AGREEMENT and DIGITAL's and IVC's performance and license
fee payments under the terms of the ORIGINAL LICENSE AGREEMENT; and
DIGITAL sent notice of termination of the ORIGINAL LICENSE AGREEMENT to IVC on
April 23, 1997; and
DIGITAL and IVC desire to resolve all disputes between them and to amend and
restate the terms and conditions of and to reinstate the license authority on a
non-exclusive basis only by executing this Amended License Agreement which
shall hereafter be referred to as the AMENDED LICENSE AGREEMENT and which
AMENDED LICENSE AGREEMENT shall amend, restate and supersede the ORIGINAL
LICENSE AGREEMENT; and
DIGITAL and IVC desire to terminate the Non-Disclosure Agreement between them
dated June 1, 1997.
NOW THEREFORE, in consideration of the mutual promises set forth herein, the
resolution of all subsisting disputes in connection with the ORIGINAL LICENSE
AGREEMENT, IVC's payment of the INITIAL ROYALTY PAYMENT and any future
ROYALTIES provided for at Article 6 hereof and IVC's payment for a portion of
and the disposition of the remainder of the products and components inventory
as directed by DIGITAL, DIGITAL and IVC agree as follows:
DIGITAL CONFIDENTIAL 3 NOVEMBER 5, 1997
<PAGE> 4
ARTICLE 1 - RESOLUTION OF DISPUTES
1.01 IVC agrees that the DIGITAL INTELLECTUAL PROPERTY RIGHTS and the
LICENSED TECHNOLOGY provided by DIGITAL under the terms of the
ORIGINAL LICENSE AGREEMENT were received and accepted and that
although the adequacy of delivery has been in dispute, upon the
execution of this AMENDED LICENSE AGREEMENT, DIGITAL has no further
obligations to deliver any tangible property (including but not
limited to products or components) or intangible property (including
but not limited to know-how, consulting or other services) to IVC
under this AMENDED LICENSE AGREEMENT or the ORIGINAL LICENSE
AGREEMENT.
1.02 IVC represents and agrees that, in connection with the negotiation and
execution of this AMENDED LICENSE AGREEMENT, DIGITAL has made no
representations of or suggestions about the existence or possibility
of future business opportunities either with DIGITAL or with any
DIGITAL subsidiary, affiliate, dealer, broker or representative or
with any public or private enterprise or agency with whom DIGITAL or
any DIGITAL subsidiary, affiliate, dealer, broker or representative
may do business now or in the future to induce IVC to enter into this
AMENDED LICENSE AGREEMENT and that IVC is familiar with the market for
any tangible or intangible product which IVC may develop from the
DIGITAL INTELLECTUAL PROPERTY RIGHTS and the LICENSED TECHNOLOGY.
1.03 IVC represents and agrees that, in connection with the negotiation and
execution of this AMENDED LICENSE AGREEMENT, DIGITAL has made no
representation or warranty with respect to the quality,
characteristics or functionality of the DIGITAL INTELLECTUAL PROPERTY
RIGHTS or the LICENSED TECHNOLOGY including but not limited to whether
it is error-free or will operate in accordance with the performance
requirements of IVC or any of its licensees or transferees. IVC
AGREES THAT THERE ARE NO EXPRESS AND IMPLIED WARRANTIES, INCLUDING ANY
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
NONE HAVE BEEN CREATED BY THE COURSE OF DEALINGS BETWEEN IVC AND
DIGITAL WITH RESPECT TO THE PERFORMANCE OF THE ORIGINAL LICENSE
AGREEMENT OR WITH RESPECT TO THE NEGOTIATION OR EXECUTION OF THIS
AMENDED LICENSE AGREEMENT.
1.04 IVC and DIGITAL agree that all license fees paid prior to the date of
this AMENDED LICENSE AGREEMENT shall be retained by DIGITAL and that
on the execution of this AMENDED LICENSE AGREEMENT IVC shall have no
further obligation to pay the license fees allegedly due to DIGITAL
from IVC under the terms of the ORIGINAL LICENSE AGREEMENT or license
fees which would have become due in the future under the ORIGINAL
LICENSE AGREEMENT. The license fees paid by IVC to DIGITAL prior to
the date of this AMENDED LICENSE AGREEMENT, however, shall NOT be
credited against any ROYALTY payments reserved to DIGITAL under the
terms of Article 6 of this AMENDED LICENSE AGREEMENT.
1.05 IVC ordered and DIGITAL delivered certain product and component
inventory to IVC subsequent to the execution of the ORIGINAL LICENSE
AGREEMENT about which there are disputes. IVC agrees that it accepted
a part of the product and component inventory delivered and represents
that it rejected a part of the product and component inventory
delivered by DIGITAL as non-conforming and damaged. DIGITAL and IVC
agree that IVC has accepted and sold, used or placed in inventory,
products and components for which it is obligated to and agrees to pay
DIGITAL the sum of ONE HUNDRED TWENTY TWO THOUSAND ONE HUNDRED AND
FORTY THREE U.S. DOLLARS (U.S. $122,143.00). IVC shall pay said sum
contemporaneously with the execution of this AMENDED LICENSE
AGREEMENT. IVC represented that it has rejected and refused to pay
for product and component inventory which the parties agree originally
had a value of One Hundred Fifty Four Thousand Five Hundred Twenty
Eight U.S. Dollars (U.S.$154,528.00) and DIGITAL has agreed to such
rejection in good
DIGITAL CONFIDENTIAL 4 NOVEMBER 5, 1997
<PAGE> 5
faith. IVC agrees to act on DIGITAL's behalf and at DIGITAL's
direction to either (a) engage an equipment salvage broker to acquire
or dispose of the rejected product and component inventory at a price
and upon terms acceptable to DIGITAL, (b) return the rejected product
and component inventory to DIGITAL or (c) destroy it and certify such
destruction.
1.06 In consideration of DIGITAL's execution of this AMENDED LICENSE
AGREEMENT, IVC agrees that it shall and does hereby release, forgive
and forever discharge DIGITAL and each of DIGITAL's present and former
subsidiaries, affiliates, officers, directors, agents, employees,
servants, and representatives, as well as the respective heirs,
personal representatives, successors and assignees of DIGITAL and each
of DIGITAL's present and former subsidiaries, affiliates, officers,
directors, agents, employees, servants and representatives
(collectively, the "Digital Released Parties") from any and all
claims, demands, actions, causes of action, suits, accounts, offsets
and other liability of any kind or character whatsoever, in law,
equity and otherwise, known, suspected or unknown, disclosed or
undisclosed, resulting from any act, omission, representation or
agreement prior to the date of this AMENDED LICENSE AGREEMENT arising
with respect to the terms, conditions, subject matter, events,
circumstances, relationships, performance or non-performance of the
ORIGINAL LICENSE AGREEMENT, any communications, negotiations,
understandings or undertakings related thereto or to the DIGITAL
INTELLECTUAL PROPERTY RIGHTS or the LICENSED TECHNOLOGY, or under any
expressed or implied warranty with respect to the INTELLECTUAL
PROPERTY RIGHTS or the LICENSED TECHNOLOGY which IVC now has or ever
has had against the Digital Released Parties, including but not
limited to those relating to the quality, functionality or fitness of
the DIGITAL INTELLECTUAL PROPERTY RIGHTS or the LICENSED TECHNOLOGY or
relating to the existence of business opportunities for IVC and its
video conferencing products. IVC also agrees not to commence, join
in, prosecute or participate, unless obligated to participate by legal
process, in any suit or other proceeding which is adverse to the
Digital Released Parties, individually and collectively, from any
fact, circumstance or other thing which exists or occurred as of the
date of, or prior to the date of, the execution of this AMENDED
LICENSE AGREEMENT whether or not IVC knows or could know of such fact,
circumstance or other thing.
1.07 In consideration of and upon IVC's execution of this AMENDED LICENSE
AGREEMENT DIGITAL agrees that it shall and does hereby release,
forgive and forever discharge IVC and each of IVC's present and
former subsidiaries, affiliates, officers, directors, agents,
employees, servants, representatives, as well as the respective heirs,
personal representatives, successors and assignees of IVC and each of
IVC's present and former subsidiaries, affiliates, officers,
directors, agents, employees, servants and representatives
(collectively, the "IVC Released Parties") from any and all claims,
demands, actions, causes of action, suits, accounts, offsets and other
liability of any kind or character whatsoever, in law, equity and
otherwise, known, suspected or unknown, disclosed or undisclosed,
arising from IVC's alleged obligation to pay license fees, and in
particular its alleged obligation to pay any guaranteed non-refundable
license fees which DIGITAL now has, would have or ever has had against
IVC under the terms of the ORIGINAL LICENSE AGREEMENT ONLY. DIGITAL
also agrees not to commence, join in, prosecute or participate, unless
obligated to participate by legal process, in any suit or other
proceeding which is adverse to the IVC Released Parties, individually
and collectively, with respect to any claim released hereby. Nothing
contained herein shall be construed to release, discharge or waive any
IVC obligation or DIGITAL right with respect to IVC's obligations to
protect DIGITAL INTELLECTUAL PROPERTY and LICENSED TECHNOLOGY, to
maintain Confidentiality, to notify any end user of DIGITAL
INTELLECTUAL PROPERTY RIGHTS in portions of the HARDWARE, SOFTWARE and
IVC LICENSED PRODUCT(S), to prohibit and enforce the prohibition
against reverse engineering, reverse compilation, disassembly or
decomposition of the SOFTWARE or to disclaim and to limit DIGITAL's
liability, or any other IVC obligation under the ORIGINAL LICENSE
AGREEMENT other than the payment of license fees contained in Article
5 thereof. Payment of the remaining balance of $2,550,000
DIGITAL CONFIDENTIAL 5 NOVEMBER 5, 1997
<PAGE> 6
outlined in Article 5 of the ORIGINAL LICENSE AGREEMENT is released,
forgiven, and forever discharged and any future payments shall be
governed by the terms of Articles 6 and 7 hereof. Nothing contained
herein shall be construed to alter, amend, diminish, waive or
discharge any obligation IVC may have to DIGITAL under the terms and
conditions of this AMENDED LICENSE AGREEMENT.
1.08 DIGITAL and IVC agree that the Non-Disclosure Agreement between them
dated as of June 1, 1997 shall terminate and be of no further force
nor effect and DIGITAL and IVC waive any notice or other technical
requirements contained therein which were intended as conditions
precedent to such termination.
AMENDED CONTINUING LICENSE TERMS
ARTICLE 2 - DEFINITIONS
As used in this AMENDED LICENSE AGREEMENT, the following terms shall have the
meanings set forth below:
2.01 DIGITAL INTELLECTUAL PROPERTY RIGHTS shall mean DIGITAL's rights in
its SPINBLASTER BOARD DESIGN and DECSpin SOFTWARE including:
2.01.01 all rights, title interests in all Letters Patent, including
any re-issue, division, continuation or continuation-in-part
applications throughout the world now or hereafter filed;
2.01.02 all rights, title and interests in all trade secrets, and
all trade secret rights arising under common law, state law,
federal law and laws of foreign countries;
2.01.03 all rights, title and interests in all mask work rights, all
copyrights and all other literary property and author
rights, whether or not copyrightable, throughout the world;
and
2.01.04 all rights, title and interests in all know-how and show-how
whether or not protected by patent, copyright or trade
secret.
2.02 DECSpin SOFTWARE shall mean the computer program defined in
Appendix A.
2.03 OBJECT FILES shall mean the object code version of the DECSpin
SOFTWARE.
2.04 SOURCE FILES shall mean the source code version of the DECSpin
SOFTWARE.
2.05 SPECIFICATION shall mean the specification of the DECSpin SOFTWARE
defined in Appendix A.
2.06 SPINBLASTER BOARD DESIGN shall mean the DIGITAL design (DIGITAL
drawing number AV320), all other existing drawings, specifications,
circuit schematics, logic diagrams, parts lists and process outlines
relating thereto and all board products, including notes on the design
of a PCMCIA board product, provided by DIGITAL to IVC.
2.07 LICENSED TECHNOLOGY shall mean the DECSpin SOFTWARE, any modifications
of the code in the DECSpin SOFTWARE, SPECIFICATION, and SPINBLASTER
BOARD DESIGN, taken in whole or in part.
DIGITAL CONFIDENTIAL 6 NOVEMBER 5, 1997
<PAGE> 7
2.08 SOFTWARE shall mean all software and documentation developed by IVC
that incorporates any code or modifications to the code from the
LICENSED TECHNOLOGY.
2.09 HARDWARE shall mean all hardware products developed by IVC that
incorporate the SPINBLASTER BOARD DESIGN or any part thereof.
2.10 IVC LICENSED PRODUCT(S) shall mean the products defined in APPENDIX B.
2.11 END USER AGREEMENT shall mean an agreement between IVC and an end
user, which shall incorporate all of the requirements listed in
Appendix C. An end user is a third party authorized by IVC to use IVC
LICENSED PRODUCTS for its internal business, with no right to further
distribute or license IVC LICENSED PRODUCTS.
2.12 IVC INTELLECTUAL PROPERTY RIGHTS shall mean IVC's rights in SOFTWARE
and HARDWARE, including:
2.12.01 All rights, title interests in all Letters Patent, including
any re-issue, division continuation or continuation-in-part
applications throughout the world now or hereafter filed;
2.12.02 All rights, title and interests in all trade secrets, and
all trade secret rights arising under common law, state law,
federal law and laws of foreign countries;
2.12.03 All rights, title and interests in all mask work rights, all
copyrights and all other literary property and author
rights, whether or not copyrightable, throughout the world;
and
2.12.04 All rights, title and interests in all know-how and show-how
whether or not protected by patent, copyright or trade
secret.
2.13 IT IS UNDERSTOOD AND AGREED THAT NOTHING CONTAINED IN THIS AMENDED
LICENSE AGREEMENT, INCLUDING THE RECITAL AND DEFINITION OF DIGITAL
INTELLECTUAL PROPERTY RIGHTS, DECSpin SOFTWARE, OBJECT FILES, SOURCE
FILES, LICENSED TECHNOLOGY, AND SPINBLASTER BOARD DESIGN, SHALL BE
CONSTRUED TO OBLIGATE DIGITAL TO DELIVER TO IVC ANY ADDITIONAL
INTELLECTUAL PROPERTY RIGHTS, DECSpin SOFTWARE, OBJECT FILES, SOURCE
FILES, LICENSED TECHNOLOGY, OR SPINBLASTER BOARD DESIGN. IVC AGREES
THAT DIGITAL HAS MADE NO PROMISE OR REPRESENTATION THAT IT HAS OR WILL
DELIVER ANY ADDITIONAL INTELLECTUAL PROPERTY RIGHTS, DECSpin SOFTWARE,
OBJECT FILES, SOURCE FILES, LICENSED TECHNOLOGY, OR SPINBLASTER BOARD
DESIGN AND THAT NOTWITHSTANDING THE DISPUTE BETWEEN THEM, DIGITAL HAS
DELIVERED ALL THAT IT WILL.
ARTICLE 3 - TITLE AND LICENSE GRANTS
3.01 Subject to the license granted to IVC as expressly set forth in this
Article 3, DIGITAL shall own and shall retain all rights, title and
interests in DIGITAL INTELLECTUAL PROPERTY RIGHTS and the LICENSED
TECHNOLOGY.
3.02 Subject to the payment of the ROYALTY set forth in Article 6, DIGITAL
grants to IVC a non-exclusive, non- transferable, license under
DIGITAL INTELLECTUAL PROPERTY RIGHTS, to:
DIGITAL CONFIDENTIAL 7 NOVEMBER 5, 1997
<PAGE> 8
3.02.01 modify SOURCE FILES for the sole purpose of developing
SOFTWARE only for use on or with IVC LICENSED PRODUCT(S);
3.02.02 merge the modified or unmodified SOURCE FILES into other
software for the sole purpose of developing SOFTWARE only
for use on or with IVC LICENSED PRODUCT(S);
3.02.03 use and copy the OBJECT FILES for the sole purpose of
developing SOFTWARE for use only on or with IVC LICENSED
PRODUCT(S);
3.02.04 copy SOFTWARE in executable code form only, solely to
manufacture IVC LICENSED PRODUCT(S); and
3.02.05 copy into IVC's end user documentation only those parts of
SPECIFICATION that are necessary for the end user to
effectively use IVC LICENSED PRODUCTS and to distribute such
user documentation only with IVC LICENSED PRODUCTS.
3.03 Subject to the payment of the ROYALTY set forth in Article 6, DIGITAL
grants to IVC a NON-EXCLUSIVE, non-transferable license under
DIGITAL's copyright, trade secret and know-how rights only (AND IVC
ACKNOWLEDGES AND AGREES THAT SAID GRANT IS NON-EXCLUSIVE) to:
3.03.01 use, adapt and modify SPINBLASTER BOARD DESIGN for the sole
purpose of developing HARDWARE for use only with IVC
LICENSED PRODUCTS;
3.03.02 manufacture, directly or through contractors, HARDWARE
solely for use with IVC LICENSED PRODUCTS worldwide; and
3.03.03 sell, rent, and/or lease HARDWARE solely for use with IVC
LICENSED PRODUCTS worldwide.
3.04 Subject to the payment of the ROYALTY set forth in Article 6, DIGITAL
grants to IVC a non-exclusive, non-transferable, license under
DIGITAL's patent rights to:
3.04.01 use SPINBLASTER BOARD DESIGN for the sole purpose of
developing HARDWARE;
3.04.02 make, directly or through contractors, HARDWARE worldwide;
and
3.04.03 sell HARDWARE worldwide.
3.05 Subject to the payment of the ROYALTY set forth in Article 6, DIGITAL
grants to IVC a non-exclusive, non-transferable, license under
DIGITAL INTELLECTUAL PROPERTY RIGHTS only to:
3.05.01 distribute IVC LICENSED PRODUCT(S) worldwide directly to end
users; and
3.05.02 distribute IVC LICENSED PRODUCT(S) worldwide indirectly
through distributors, provided each of such distributors has
entered into a Distribution Agreement with IVC.
3.06 IVC grants DIGITAL a non-exclusive, worldwide, royalty free license,
under all IVC's INTELLECTUAL PROPERTY RIGHTS to make, have made, and
use for DIGITAL's own internal use all SOFTWARE and all products
derived from the SOFTWARE by DIGITAL for its
DIGITAL CONFIDENTIAL 8 NOVEMBER 5, 1997
<PAGE> 9
own internal use. IVC shall provide to DIGITAL, on a mutually agreed
upon medium, all SOFTWARE, in source code form, within fifteen (15)
days after the time such SOFTWARE is incorporated into IVC LICENSED
PRODUCT(S) or is otherwise available for transfer to DIGITAL. The
SOFTWARE will be provided by IVC on an "AS IS" basis and without
warranty or representation of the quality, characteristics or
functionality of the SOFTWARE including but not limited to whether it
is error-free or will operate in accordance with the performance
requirements of DIGITAL or any of its licensees or transferees.
ARTICLE 4 - CONFIDENTIALITY
4.01 IVC agrees to maintain the LICENSED TECHNOLOGY confidential and not to
disclose the LICENSED TECHNOLOGY to any third party, except as
provided herein, without the prior written consent of DIGITAL, nor use
the LICENSED TECHNOLOGY for any purposes other than as authorized
herein.
4.02 IVC shall not be obligated to maintain confidential that part of the
LICENSED TECHNOLOGY which:
4.02.01 is or becomes known to the public, other than by breach of
an agreement;
4.02.02 is communicated by DIGITAL to a third party free of any
obligation of confidence;
4.02.03 is information which IVC can demonstrate was developed by it
independently; or
4.02.04 is information that was in IVC's possession without
confidentiality restriction prior to disclosure by DIGITAL.
4.03 IVC shall provide access to LICENSED TECHNOLOGY to its employees or
contractors only on a need-to-know basis in order to exercise its
license hereunder, and shall require such employees or contractors to
comply with the confidentiality provisions of this Article.
4.04 IVC shall keep clear and accurate records with respect to the type,
serial number and location of each designated computer on which a
complete or partial copy of the SOURCE FILES are installed and shall
make such records available to DIGITAL upon request.
4.05 IVC shall only make no more than ten (10) archival copies of the
LICENSED TECHNOLOGY without the written authorization of DIGITAL.
4.06 Except as provided herein, IVC may not otherwise copy, duplicate, or
reproduce the LICENSED TECHNOLOGY, or permit others to copy, duplicate
or reproduce the LICENSED TECHNOLOGY.
ARTICLE 5 - TECHNICAL ASSISTANCE
5.01 DIGITAL shall have no obligation to provide IVC with any technical
assistance. Upon IVC's written request to DIGITAL for technical
assistance, DIGITAL may, in its sole discretion, provide IVC the
requested technical assistance at DIGITAL's commercial rates then in
effect under a separate agreement.
ARTICLE 6 - ROYALTY PAYMENTS
6.01 In consideration of the rights previously granted to IVC under the
ORIGINAL LICENSE AGREEMENT and the rights granted to IVC under this
AMENDED LICENSE AGREEMENT,
DIGITAL CONFIDENTIAL 9 NOVEMBER 5, 1997
<PAGE> 10
IVC agrees to pay DIGITAL, Royalty ("ROYALTY") calculated on NET
QUANTITY (as defined below) as follows:
6.01.01 On each unit of Type I IVC LICENSED PRODUCT described at
Appendix B, attached hereto, that is SOLD by IVC, a royalty
of FIVE HUNDRED U.S. DOLLARS (U.S. $500.00).
6.01.02 On each unit in excess of a total of ten (10) units of Type
I IVC LICENSED PRODUCT, described at Appendix B, attached
hereto, USED by IVC, a royalty of FIVE HUNDRED U.S.
DOLLARS (U.S. $500.00).
6.01.03 On each unit of Type II IVC LICENSED PRODUCT described at
Appendix B, attached hereto, that is SOLD by IVC, a royalty
of ONE THOUSAND U.S. DOLLARS (U.S. $1000.00).
6.01.04 On each unit in excess of a total of four (4) units of Type
II IVC LICENSED PRODUCT described at Appendix B, attached
hereto, USED by IVC, a royalty of ONE THOUSAND U.S. DOLLARS
(U.S. $1000.00).
6.02 USE or USED shall mean the use by IVC for purposes other than testing
the unit of the IVC LICENSED PRODUCT itself. IVC may USE ten (10)
units of Type I IVC LICENSED PRODUCT and four (4) units of Type II IVC
LICENSED PRODUCT during the life of this AMENDED LICENSE AGREEMENT,
without paying ROYALTY on any of those units. After this, IVC shall
pay ROYALTY on each additional unit the first time it is USED at rates
specified in Article 6.01. IVC will not be obligated to pay ROYALTY
more than once on any unit USED.
6.03 SOLD or SALE(S), of any IVC LICENSED PRODUCT(S), shall mean any IVC
LICENSED PRODUCT that is leased, sold, exported or otherwise disposed
of for revenue or demonstration purposes by IVC anywhere in the world.
The SALE shall be deemed to have occurred on the date it is shipped or
invoiced by IVC, whichever is earlier.
6.04 NET QUANTITY in a Payment Period, for the purpose of determining IVC's
ROYALTY obligation, shall mean the number of units of IVC LICENSED
PRODUCTS first USED during the Payment Period plus the number of units
of IVC LICENSED PRODUCT(S) SOLD less the number returned and accepted
for return by IVC during that Payment Period.
6.05 IVC agrees that it will market and support the IVC LICENSED PRODUCTS
for at least one year from the EFFECTIVE DATE of this AMENDED LICENSE
AGREEMENT. IVC has made no representations to DIGITAL regarding any
future sales prospects for IVC LICENSED PRODUCTS or any future ROYALTY
payments and there is no agreement that either will reach a certain
level.
6.06 All payments specified herein shall be made in lawful currency of the
United States of America. Any ROYALTY shall be paid to DIGITAL in the
full amount calculated in accordance with this Article 6 and shall not
be reduced for any reason, including foreign withholding taxes
attributable to either party, if any.
ARTICLE 7 - PAYMENT, REPORTS AND RECORDS
7.01 Contemporaneous with the execution of this AMENDED LICENSE AGREEMENT,
IVC shall pay DIGITAL a non-refundable payment of ONE HUNDRED FIFTY
THOUSAND U.S. DOLLARS (U.S.$150,000.00) ("INITIAL ROYALTY PAYMENT").
No part of the INITIAL ROYALTY PAYMENT shall be refundable for any
reason, including a finding of invalidity or unenforceability as to
any DIGITAL INTELLECTUAL PROPERTY RIGHTS.
DIGITAL CONFIDENTIAL 10 NOVEMBER 5, 1997
<PAGE> 11
7.02 Within 30 days after the EFFECTIVE DATE of this AMENDED LICENSE
AGREEMENT, IVC shall provide DIGITAL with a written Payment Report, in
the format shown in Appendix D, signed by an officer of IVC certifying
the NET QUANTITY of Type I and Type II IVC LICENSED PRODUCTS, if any,
between June 13, 1996 and the EFFECTIVE DATE of this AMENDED LICENSE
AGREEMENT. The ROYALTY amount calculated in accordance with Article 6
shall represent IVC's accrued ROYALTY obligation as of the EFFECTIVE
DATE of this AMENDED LICENSE AGREEMENT. An amount equal to One
Hundred Thousand U.S. Dollars (U.S.$100,000) of the INITIAL ROYALTY
PAYMENT shall be credited first against this accrued ROYALTY
obligation. In the event that this accrued ROYALTY obligation shall
exceed One Hundred Thousand U.S. Dollars (U.S.$100,000), then IVC
shall pay any unsatisfied amount contemporaneously with the submission
of its Payment Report.
7.03 Starting with the EFFECTIVE DATE, the ROYALTY shall become due and
owing to DIGITAL for each three month period ending on the last day of
every September, December, March and June ("Payment Period") of each
year. IVC shall pay any ROYALTY due and owing to DIGITAL for IVC's
NET QUANTITY in each Payment Period, within thirty (30) days after the
last day of the corresponding Payment Period ("Payment Due Date").
7.03.01 If IVC's accrued ROYALTY obligation as of the EFFECTIVE
DATE is less than One Hundred Thousand U.S. Dollars
(U.S.$100,000), then the remaining balance of the One
Hundred Thousand U.S. Dollars (U.S.$100,000) shall be
credited against IVC's ROYALTY obligation accrued after the
EFFECTIVE DATE. IVC shall pay ROYALTY accrued after the
EFFECTIVE DATE in excess of such credit.
7.03.02 IVC shall not be entitled to credit any part of the INITIAL
ROYALTY PAYMENT in excess of One Hundred Thousand U.S.
Dollars (U.S.$100,000) against its ROYALTY obligations
accruing after the EFFECTIVE DATE for four years from the
EFFECTIVE DATE of this AMENDED LICENSE AGREEMENT. If,
however, IVC shall have paid its ROYALTY obligations in
accordance with the terms of this AMENDED LICENSE AGREEMENT
for four years from the EFFECTIVE DATE, then IVC shall be
allowed to credit the entire remaining balance of the
INITIAL ROYALTY PAYMENT against ROYALTY obligations accruing
thereafter.
7.04 IVC shall pay interest to DIGITAL from the Payment Due Date to the
actual date of payment upon any and all amounts that are overdue and
payable hereunder at the rate of 2% above the prime interest rate of
Citibank of New York published in THE WALL STREET JOURNAL, on the
Payment Due Date. Said interest rate shall, in no event, exceed any
applicable usury law limitation.
7.05 Within 30 days after the close of any Payment Period, subject only to
Article 7.05.02, IVC shall furnish DIGITAL a report for each Payment
Period ("Payment Report") certifying the NET QUANTITY of Type I and
Type II IVC LICENSED PRODUCTS. Each Payment Report shall be certified
by an officer of IVC and shall specify any ROYALTY payable to DIGITAL
for that Payment Period pursuant to this AMENDED LICENSE AGREEMENT.
The Payment Report shall be in the format of Payment Report attached
hereto as Appendix D. In addition,
7.05.01 Each Payment Report shall be in the English language and
shall be submitted to DIGITAL at the address given in
Article 13 on or before the Payment Due Date. Payment
Reports shall be required and submitted whether or not any
ROYALTY has accrued during the Payment Period.
7.05.02 If IVC shall report that the NET QUANTITY of IVC LICENSED
PRODUCTS is equal to zero (0) for each of four (4)
consecutive Payment Periods, IVC's obligation
DIGITAL CONFIDENTIAL 11 NOVEMBER 5, 1997
<PAGE> 12
to provide Payment Reports shall be suspended and IVC shall
not be obligated to submit a Payment Report until and unless
it shall thereafter have USED or SOLD any quantity of IVC
LICENSED PRODUCTS, in which case IVC's reporting obligation
shall resume until and unless it shall once again report
that the NET QUANTITY of IVC LICENSED PRODUCTS is equal to
zero (0) for each of four (4) consecutive Payment Periods.
7.05.03 IVC shall promptly furnish whatever additional information
DIGITAL may reasonably request from time to time to enable
DIGITAL to verify the calculation of ROYALTY due to DIGITAL.
7.06 All payments should be made either by check or electronic funds
transfer in U.S. currency. If payment is made by check, each check
(in U.S. currency), together with a copy of the corresponding Payment
Report, in the format shown in Appendix D, shall be mailed to:
U. S. Cash Applications (Attention: A/R Supervisor
AKO1-2/B13)
Digital Equipment Corporation
100 Nagog Park
Acton, MA 01720
If the payment is made by electronic funds transfer, the funds (in
U.S. currency) should be transferred to:
Citibank, N.A.
399 Park Avenue
New York, NY 10043
Account Number: 40647503
ABA Number: 021000089
or to any other bank or bank account number designated by DIGITAL
clearly stating this AMENDED LICENSE AGREEMENT number. For each
payment, a FAX notification containing this AMENDED LICENSE AGREEMENT
number, amount paid in U.S. currency, the check number or the account
number from which the electronic funds transfer is made, and the date
of such check or transfer, shall be sent to:
Director, Corporate Licensing Office
Digital Equipment Corporation,
at FAX number (978) 493-9007, or any other FAX number designated by
DIGITAL.
7.07 IVC shall make and retain, for at least four (4) years from the
Payment Due Date, records, files and books of account containing all
data reasonably required for the full computation and verification of
any amounts due under this AMENDED LICENSE AGREEMENT.
7.08 IVC shall permit reasonable inspection of such records, files and
books of account, not more than once in six (6) months, by an auditor
appointed by DIGITAL, who shall report to DIGITAL only the amount of
ROYALTY due and payable to DIGITAL. Any such inspections shall be at
DIGITAL's expense; provided however, if as a result of such an
inspection a deficiency in the amount of payments is determined and
the deficiency exceeds ten percent (10%) of the payment actually made
for the period of time investigated, then in addition to paying to
DIGITAL the deficiency so determined, IVC shall pay the fees and
expenses of the auditor conducting such investigation.
DIGITAL CONFIDENTIAL 12 NOVEMBER 5, 1997
<PAGE> 13
ARTICLE 8 - DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY
8.01 Nothing contained in this AMENDED LICENSE AGREEMENT, nor in the
ORIGINAL LICENSE AGREEMENT, shall be construed as a warranty or
representation by DIGITAL as to:
(i) the validity or scope of DIGITAL INTELLECTUAL PROPERTY
RIGHTS;
(ii) the quality or accuracy of the LICENSED TECHNOLOGY;
(iii) the usefulness of the LICENSED TECHNOLOGY;
(iv) a requirement that DIGITAL shall file any patent
application, secure any patent, or maintain any patent
in force;
(v) an obligation to bring or prosecute actions or suits
against third parties for infringement;
(vi) a grant by implication, estoppel, or otherwise, of any
of DIGITAL INTELLECTUAL PROPERTY RIGHTS beyond those
covered by the LICENSED TECHNOLOGY; and
(vii) a grant by implication, estoppel, or otherwise, of the
right to sublicense the LICENSED TECHNOLOGY and all
products derived from LICENSED TECHNOLOGY.
8.02 The LICENSED TECHNOLOGY is provided by DIGITAL on an "AS IS" basis and
without warranty or representation of the quality, characteristics or
functionality of the LICENSED TECHNOLOGY including but not limited to
whether it is error-free or will operate in accordance with the
performance requirements of IVC or any of its licensees or
transferees. The LICENSED TECHNOLOGY is the same technology as
DIGITAL offered or planned to offer commercially prior to the
execution of the ORIGINAL LICENSE AGREEMENT. DIGITAL HEREBY DISCLAIMS
AND IVC AGREES THAT IT HAS NOT RELIED ON ANY EXPRESS OR IMPLIED
WARRANTIES, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE.
8.03 DIGITAL makes no warranty or representation that any making, using,
licensing or other disposition of IVC LICENSED PRODUCT(S) by IVC will
be free from infringement of any intellectual property rights owned by
any third party, and DIGITAL shall have no obligation to defend,
indemnify, or hold harmless IVC from any suit, action or claim
alleging infringement of any third party's property rights. DIGITAL
restates the representation contained in the ORIGINAL LICENSE
AGREEMENT that it was not aware of any claim of intellectual property
infringement against the LICENSED TECHNOLOGY as of June 13, 1996.
DIGITAL has made no further investigation of its records since that
date as to the assertion of any claim.
8.04 In no event shall DIGITAL be liable to IVC or its distributors or end
users for any lost data, lost profits, incidental, consequential,
special, or indirect damages arising from the use of the LICENSED
TECHNOLOGY. DIGITAL's total liability arising out of the licensing of
the LICENSED TECHNOLOGY for breach of this AMENDED LICENSE AGREEMENT,
the ORIGINAL LICENSE AGREEMENT or for any other claim shall not exceed
in total the amount of payments paid by IVC under this AMENDED LICENSE
AGREEMENT ONLY. This limitation of liability shall apply regardless
of the form of action, whether in contract or tort. Any action
against DIGITAL must be brought within eighteen (18) months after such
cause of action arises, or IVC first becomes aware of such cause of
action.
8.05 IVC shall not be liable to DIGITAL for any breach of the terms of any
END USER AGREEMENT unless IVC has willfully or negligently contributed
to, or cooperated in the breach.
DIGITAL CONFIDENTIAL 13 NOVEMBER 5, 1997
<PAGE> 14
8.06 IVC shall fully cooperate with DIGITAL in any action DIGITAL may bring
or defend involving any third party alleged to have breached the terms
of an END USER AGREEMENT or Distribution Agreement, or alleged to have
infringed upon DIGITAL's rights in the LICENSED TECHNOLOGY.
ARTICLE 9 - INDEMNITY
9.01 Excepting only claims by third parties against DIGITAL related to
DIGITAL INTELLECTUAL PROPERTY RIGHTS, IVC will hold DIGITAL harmless
against all liabilities, demands, damages, expenses, or losses arising
(i) out of use by IVC or its distributors of LICENSED TECHNOLOGY or
information furnished under this AMENDED LICENSE AGREEMENT or (ii) out
of any use, license, or other disposition by IVC or its distributors
of IVC LICENSED PRODUCT(S).
ARTICLE 10 - TERM AND TERMINATION
10.01 The term of this AMENDED LICENSE AGREEMENT shall commence on the
EFFECTIVE DATE and continue thereafter unless sooner terminated in
accordance with this Article.
10.02 This AMENDED LICENSE AGREEMENT may be terminated by the non-defaulting
party only upon the other party's default and by sending a Notice of
Termination in accordance with Article 13. Any of the following
constitutes a default:
10.02.01 A party defaults in the performance or observation of any
material provision or material condition on its part to be
performed or observed, including a failure to make any
payment due hereunder, and if such defaulting party fails to
cure the default within thirty (30) days after receipt of
written notice of the default from the other party;
10.02.02 A party files a voluntary petition in bankruptcy or is
adjudicated a bankrupt or insolvent or files any petition or
answer seeking any arrangement, composition, liquidation, or
dissolution under any present or future federal, state, or
other statute, law or regulation relating to bankruptcy,
insolvency or other relief for debtors, or seeks or
consents or acquiesces in the appointment of any trustee,
receiver, or liquidator of all or any substantial part of
its properties, or makes any general assignment for the
benefit of creditors, or admits in writing its inability to
pay its debts generally as they become due;
10.02.03 A court enters an order, judgment, or decree approving a
petition filed against either party seeking any arrangement,
composition, liquidation, dissolution or similar relief
under any present or future federal, state or other statute,
law, or regulation relating to bankruptcy, insolvency, or
other relief for debtors, and such order, judgment or decree
remains unvacated or unstayed for an aggregate of thirty
(30) days.
10.03 The termination rights provided herein shall be in addition to and not
in substitution for any right to damages or injunctive relief that may
be available to or exercisable by the party terminating or having the
right to terminate this AMENDED LICENSE AGREEMENT, nor shall such
termination rights relieve either party from liability or damage to
the other party for breach of this AMENDED LICENSE AGREEMENT.
10.04 Upon termination of this AMENDED LICENSE AGREEMENT by DIGITAL, IVC
shall immediately cease to use LICENSED TECHNOLOGY, HARDWARE, and
SOFTWARE and shall at DIGITAL's option, either (a) return to DIGITAL
within sixty (60) days of termination all drawings, specifications,
other documents, software, updates and improvements provided
DIGITAL CONFIDENTIAL 14 NOVEMBER 5, 1997
<PAGE> 15
hereunder and all complete and partial copies and derivatives thereof,
in its possession or, (b) destroy all of such material and certify
such destruction to DIGITAL.
10.05 Upon termination of this AMENDED LICENSE AGREEMENT, IVC may retain the
documents and software required by IVC to maintain and repair the IVC
LICENSED PRODUCT(S) that have been marketed to third parties, but only
for this purpose. IVC shall, at DIGITAL's option, either (a) return
to DIGITAL all other documents and software not required for
maintenance and repair within sixty (60) days after such expiration or
termination or (b) destroy and certify the destruction of such
material.
10.06 Termination or expiration of this AMENDED LICENSE AGREEMENT shall not
affect licenses to use IVC LICENSED PRODUCT(S) granted by IVC under
this AMENDED LICENSE AGREEMENT in good faith and for consideration
prior to receiving or giving Notice of Termination.
10.07 Upon expiration or termination of this AMENDED LICENSE AGREEMENT,
DIGITAL may request and IVC shall promptly provide a certificate in
writing that it has not provided the IVC LICENSED PRODUCT(S) to any
third party except in accordance with this AMENDED LICENSE AGREEMENT.
ARTICLE 11 - PUBLICITY
11.01 The existence of this AMENDED LICENSE AGREEMENT is not considered to
be confidential. However, the terms of this AMENDED LICENSE AGREEMENT
are considered to be the confidential information of the parties.
Except as expressly provided in this AMENDED LICENSE AGREEMENT, a
party shall not disclose the terms of this AMENDED LICENSE AGREEMENT
(including its Appendices), or use or refer to this AMENDED LICENSE
AGREEMENT or any provision of or rights granted under this AMENDED
LICENSE AGREEMENT in any publicity, advertising, or promotional
activity, without the written approval of the other party, except as
may be required by law, or regulation, or by the order of any
governmental or judicial authority.
ARTICLE 12 - REPRESENTATIONS AND UNDERSTANDINGS
12.01 Each of the parties expressly represents and warrants that it has full
power and authority to enter into this AMENDED LICENSE AGREEMENT.
12.02 Each of the parties has received independent legal advice from
attorneys of their choice. Each of the parties has contributed to the
drafting of this AMENDED LICENSE AGREEMENT and the parties agree that
the AMENDED LICENSE AGREEMENT shall not be interpreted for or against
any party on the basis that one drafted or contributed to the drafting
of any provision.
12.03 DIGITAL and IVC respectively warrant and represent to each other that
there has been no assignment or transfer of any of their respective
rights, claims, demands, and causes of action covered by the releases
contained in this AMENDED LICENSE AGREEMENT and further represent and
warrant that there are no liens, or claims for liens, or assignments
in law or equity of or against the claims, demands and causes of
action released hereby.
12.04 DIGITAL and IVC respectively warrant and represent to each other that
they have relied upon their own judgment and that of their legal
counsel regarding the proper, complete and agreed upon consideration
for, and terms and provisions of, this AMENDED LICENSE AGREEMENT, that
they assume the risk of mistake of fact in connection with the true
facts involved; and that they are not relying upon any representation
made by the other party.
DIGITAL CONFIDENTIAL 15 NOVEMBER 5, 1997
<PAGE> 16
12.05 IVC represents that it shall not use or incorporate the LICENSED
TECHNOLOGY, in part or in full, or any derivatives (as defined in 17
U.S.C. Section 101 and applied under Section 106) of any copyrighted
portion of the LICENSED TECHNOLOGY, in any way into any products,
including any PC-based video conferencing product that enables
conferencing and communications with any other video conferencing
product both of which only use data compression techniques other than
motion-JPEG, such as, MPEG, H.261, H.263, manifold, wavelet, fractal
or any other algorithm, or any PC-based gateway product that enables
communication between systems both of which only use data compression
techniques other than motion-JPEG, such as, MPEG, H.261, H.263,
manifold, wavelet, fractal, or any other algorithm, except IVC
LICENSED PRODUCTS.
ARTICLE 13 - GENERAL
13.01 Neither this AMENDED LICENSE AGREEMENT nor any rights or benefits
accruing hereunder shall be assigned, in whole or in part, by IVC
and no duty or obligation arising hereunder shall be delegated by
IVC without the written consent of DIGITAL, and any such purported
assignment or delegation shall be null and void, provided, however,
that DIGITAL shall not unreasonably withhold its consent to such
assignment or delegation by IVC.
13.02 Nothing in this AMENDED LICENSE AGREEMENT shall be construed as
making either party the agent of the other.
13.03 The failure of either party to give notice to the other party of the
breach or non-fulfillment of any term, clause, provision or
condition of this AMENDED LICENSE AGREEMENT shall not constitute a
waiver thereof, nor shall the waiver of any breach or
non-fulfillment of any term, clause, provision or condition of this
AMENDED LICENSE AGREEMENT constitute a waiver of any other breach or
non-fulfillment of that or any other term, clause, provision or
condition of this AMENDED LICENSE AGREEMENT.
13.04 Notice to a party hereto shall be in writing and deemed to have been
sufficiently given or served for all purposes hereof if personally
delivered or mailed by first class certified or registered mail,
return receipt requested, postage prepaid, or commercial overnight
delivery service, at the respective addresses set forth below, or at
such other address as the party to whom such notice is directed may
designate from time to time by like notice in writing to the other
party hereto. A notice shall be deemed to have been given on the
date on which it was received.
Notices shall be directed to DIGITAL at:
Director, Corporate Licensing Office
Digital Equipment Corporation
111 Powder Mill Road, MSO2-3/C11
Maynard, MA 01754
Notices shall be directed to IVC at:
President
Intelect Visual Communications Corp.
1100 Executive Drive
Richardson, TX 75081
13.05 If any provision of this AMENDED LICENSE AGREEMENT is held invalid
by any law, rule, order, or by the final determination of any State
or Federal court, it shall not affect any other provisions of this
AMENDED LICENSE AGREEMENT which can be given effect without
DIGITAL CONFIDENTIAL 16 NOVEMBER 5, 1997
<PAGE> 17
such invalid provision and to this extent the parties agree that the
provisions of this AMENDED LICENSE AGREEMENT are and shall be
severable.
13.06 IVC recognizes that the transfer of the HARDWARE, SOFTWARE, or IVC
LICENSED PRODUCT(S) from one country to another if authorized
hereunder, may be subject to the approval of the government of the
United States of America and/or other countries that IVC might
operate in, or various agencies thereof, and international control
organizations in which such governments participate. DIGITAL shall
have no obligation to obtain any such approvals as are required by
such governments or bodies before any such transfer is effected.
13.07 IVC shall only distribute IVC LICENSED PRODUCT(S) and related
materials with proper inclusion of any copyright and proprietary
notices, legends, and markings. Related materials and applicable
initialization and configuration screens of the IVC LICENSED
PRODUCT(S) software component, shall also include such notices,
legends and markings. With respect to any document or software
containing a copyright notice and/or a confidential, proprietary,
restricted, or similar legend, provided by DIGITAL under the
ORIGINAL LICENSE AGREEMENT or this AMENDED LICENSE AGREEMENT, IVC
shall agree to include or shall have its distributors include the
copyright notice and/or such legend on all authorized reproductions
it makes of such document or software in the same manner and
location that such notice and/or legend appears in the document or
software provided.
13.08 This AMENDED LICENSE AGREEMENT is governed by the laws of the
Commonwealth of Massachusetts, United States of America.
13.09 This AMENDED LICENSE AGREEMENT sets forth the entire agreement and
understanding between the parties as to the subject matter hereof
and merges all prior discussions and agreements between them, and
neither of the parties shall be bound by any conditions,
definitions, warranties, understandings or representations with
respect to such subject matter other than as expressly provided
herein. This AMENDED LICENSE AGREEMENT may not be modified,
amended, or supplemented except by a document executed by a proper
and duly authorized officer or representative of the party to be
bound thereby.
IN WITNESS WHEREOF, the parties hereto have as of the EFFECTIVE DATE as defined
above caused this AMENDED LICENSE AGREEMENT, which includes Appendices A, B, C
and D to be signed in duplicate by their duly authorized representatives.
DIGITAL EQUIPMENT CORPORATION INTELECT VISUAL COMMUNICATIONS,
CORP.
/s/ Jay Zager /s/ Edwin Ducayet
- ------------------------------ -------------------------------
Signed Signed
Jay Zager Edwin Ducayet
- ------------------------------ -------------------------------
Printed or Typed Printed or Typed
VP, Business Development Treasurer
- ------------------------------ -------------------------------
Title Title
Date: 11/6/97 Date: 11/5/97
------------------------ ------------------------
DIGITAL CONFIDENTIAL 17 NOVEMBER 5, 1997
<PAGE> 18
APPENDIX A - DESCRIPTION OF LICENSED TECHNOLOGY
DECSpin SOFTWARE licensed under this AMENDED LICENSE AGREEMENT is the
version of the software marketed by DIGITAL as of June 13, 1996 under
the name DECSpin for Windows as delivered to IVC pursuant to the
ORIGINAL LICENSE AGREEMENT. DECSpin (Digital Equipment Corporation's
Sound Picture Information Network) SOFTWARE is a desk-to-desk, live
audio and video conferencing application, providing real time
communications between personal computers equipped with multimedia and
networking options. One of the options required is the AV320
SPINblaster video conferencing board.
The AV320 SPINblaster board licensed under this AMENDED LICENSE
AGREEMENT is the version of the board marketed by DIGITAL as of June
13, 1996 under the name AV320 as delivered to IVC pursuant to the
ORIGINAL LICENSE AGREEMENT. The AV320 card is a multi-functional, ISA
bus-based card that provides full-duplex audio/video capture/playback
with motion-JPEG compression/decompression.
It is expressly understood and agreed that the description of the
LICENSED TECHNOLOGY is for identification purposes ONLY and is not
intended by DIGITAL or by IVC to constitute a representation of the
character of the LICENSED TECHNOLOGY nor a warranty of the quality or
fitness of the LICENSED TECHNOLOGY for any particular purpose. IVC
has had the LICENSED TECHNOLOGY in its possession for more than 12
months and it is relying on its own investigation and assessment of
the LICENSED TECHNOLOGY.
DIGITAL CONFIDENTIAL 18 NOVEMBER 5, 1997
<PAGE> 19
APPENDIX B - DEFINITION OF IVC LICENSED PRODUCTS
IVC LICENSED PRODUCTS means only those products in which the LICENSED
TECHNOLOGY, or any part thereof, is used, consisting only of the Type I and
Type II categories set forth below. Royalty payments described in Article 6
will be based upon IVC LICENSED PRODUCTS only and not on any other products
made by IVC.
Type I IVC LICENSED PRODUCT: Any PC-based video conferencing
product that utilizes motion-JPEG video data compression, enables
conferencing and communications with other video conferencing products
that utilize motion-JPEG video data compression, and incorporates the
LICENSED TECHNOLOGY or any part thereof.
The Type I IVC LICENSED PRODUCT that is currently marketed by IVC as
"LANscape 1.4" or "DL100." This product is a PC-based hardware and
software video conferencing product that uses motion-JPEG video data
compression and uses the Transmission Control Protocol/Internet
Protocol ("TCP/IP") for transmission of the audio and video data.
Type II IVC LICENSED PRODUCT: Any PC-based gateway product that
enables videoconferencing on a Wide Area Network (WAN) by enabling
communication between video conferencing products that utilize
motion-JPEG video data compression on one side and other video
conferencing products that utilize other data compression and
communication protocols on the other side, and that incorporates the
LICENSED TECHNOLOGY or any part thereof.
The Type II IVC LICENSED PRODUCT that is currently marketed by IVC is
"VuBridge." This is a PC-based product that enables the Type I IVC
LICENSED PRODUCT to connect the IP-based, motion JPEG product to any
H.320/H.261 video conferencing system via ISDN lines. This is a
shared gateway resource that allows many users to connect from their
IP-based local network to the Wide Area Network ("WAN"). The Type II
IVC LICENSED PRODUCT translates motion JPEG compressed data into
H.261-compressed data and vice-versa.
Type II IVC LICENSED PRODUCTS also include future products that allow
the Type I IVC LICENSED PRODUCTS to inter-operate with any other
product that utilizes any other compression protocol than motion JPEG
or any other data communications protocol than TCP/IP. (For example,
the H.323 or H.324 communications protocols, the wavelet or fractal
compression algorithms, etc.).
IVC LICENSED PRODUCT does not include:
Any PC-based video conferencing product that enables conferencing and
communications with any other video conferencing product both of which only use
data compression techniques other than motion-JPEG, such as, MPEG, H.261,
H.263, manifold, wavelet, fractal or any other algorithm.
Any PC-based gateway product that enables communication between systems both of
which only use data compression techniques other than motion-JPEG, such as,
MPEG, H.261, H.263, manifold, wavelet, fractal, or any other algorithm.
DIGITAL CONFIDENTIAL 19 NOVEMBER 5, 1997
<PAGE> 20
APPENDIX C - LEGAL REQUIREMENTS FOR END USER AGREEMENTS
END USER AGREEMENTS shall, among other things, provide the following:
1. Include a clearly visible END USER AGREEMENT with each of the IVC
LICENSED PRODUCT(S). End user(s) shall acquire the right to use the
IVC LICENSED PRODUCT(S) only if the END USER AGREEMENT with each of
the IVC LICENSED PRODUCT(S) shall be visible to, and readable by, each
end user prior to the end user's use of the IVC LICENSED PRODUCT(S).
2. Specify that DIGITAL has intellectual property rights in the HARDWARE,
SOFTWARE and IVC LICENSED PRODUCT(S).
3. Restrict the use of the HARDWARE, and SOFTWARE solely to IVC LICENSED
PRODUCT(S).
4. Prohibit use of the HARDWARE or SOFTWARE for any purpose outside the
scope of IVC LICENSED PRODUCT(S).
5. Prohibit the reverse engineering, reverse compilation, disassembly or
decomposition of the SOFTWARE.
6. Specify that title of the SOFTWARE does not pass to the end user.
7. Disclaim DIGITAL's liability for any damages, whether direct,
indirect, incidental or consequential arising from the use of the IVC
LICENSED PRODUCT(S).
8. Require the end user, at the termination or expiration of the END USER
AGREEMENT, to discontinue use and destroy or return to IVC all
associated LICENSED TECHNOLOGY and all archival or other copies of the
SOFTWARE.
DIGITAL CONFIDENTIAL 20 NOVEMBER 5, 1997
<PAGE> 21
APPENDIX D - FORMAT OF PAYMENT REPORT
Name of Licensee: Intelect Visual Agreement Number:
-----------------------
Communications Payment Period:
-----------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Model Type of Quantity Royalty Free Quantity Quantity NET Royalty Royalty
Number Product First Quantity of of Returns QUANTITY Rate Payable
(I or II)* USED USED SALES *** ($/unit) (US$)
**
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(A) (B) (C) (D) (N)=(A- (R) (N) x
B+C-D) (R)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ROYALTY DUE FOR THE CURRENT PAYMENT PERIOD
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* See Appendix B - DEFINITION OF IVC LICENSED PRODUCTS
** 10 Units of Type I and 4 Units of Type II over life (Article 6.02)
*** See Articles 6.01, 6.02, 6.03, and 6.04.
ADJUSTMENT OF PREPAID ROYALTIES
(See Article 7.03)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
US$
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance of Initial Royalty carried forward (B)
- ------------------------------------------------------------------------------------------------------------------------
Total Royalty due for the current Payment Period
(from the table above) (R)
- ------------------------------------------------------------------------------------------------------------------------
Net amount payable during the current Payment Period
(R - B) Nil if B > R
- ------------------------------------------------------------------------------------------------------------------------
Balance of Initial Royalty carried forward to the
next Payment Period (B - R) Nil if R>B
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If by check: If by electronic funds transfer:
Amount Paid: US$ Amount Transferred: US$
----------- ---------------------
Check Number: Name of Bank from which
--------------- the amount is transferred:
-------------------
Check Date:
----------------- Account Number transferred from:
-------------
Date of Transfer:
--------------------
Signature
------------------------------
Name
------------------------------
(Printed or Typed)
Title
------------------------------
Date
------------------------------
DIGITAL CONFIDENTIAL 21 NOVEMBER 5, 1997
<PAGE> 1
EXHIBIT 11
INTELECT COMMUNICATIONS SYSTEMS LIMITED AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary and Fully Diluted Loss Per Share
Shares in issue beginning of period 21,149,760 12,885,537 15,027,728 11,385,117
Shares issued (weighted average) 754,741 226,494 4,427,550 1,112,683
------------ ----------- ----------- -----------
Weighted average shares in issue end of period 21,904,501 13,112,031 9,455,278 12,497,800
Dilutive common stock equivalents:
Stock options using treasury stock method
(weighted average) -- 434,434 -- 1,001,039
============ =========== =========== ===========
Total weighted average common shares and
common stock equivalents 21,904,501 13,546,465 19,455,278 13,498,839
============ =========== =========== ===========
Loss for period (thousands of Dollars) $ (4,478) (8,503) (17,529) (15,363)
============ =========== =========== ===========
Loss per share $ (0.20) (0.63) (0.90) (1.14)
============ =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,108
<SECURITIES> 920
<RECEIVABLES> 12,325
<ALLOWANCES> 27
<INVENTORY> 4,098
<CURRENT-ASSETS> 20,095
<PP&E> 7,708
<DEPRECIATION> 1,883
<TOTAL-ASSETS> 47,388
<CURRENT-LIABILITIES> 23,544
<BONDS> 0
0
50
<COMMON> 226
<OTHER-SE> 23,139
<TOTAL-LIABILITY-AND-EQUITY> 47,388
<SALES> 8,419
<TOTAL-REVENUES> 11,076
<CGS> 7,141
<TOTAL-COSTS> 7,141
<OTHER-EXPENSES> 8,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> (4,260)
<INCOME-TAX> (40)
<INCOME-CONTINUING> (4,300)
<DISCONTINUED> (178)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,478)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
