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[FORM 10K LOGO]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1997
Commission File Number 000-23260
GLOBAL VILLAGE COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
IRS identification number: 94-3095680
1144 East Arques Avenue
Sunnyvale, CA 94086-4602
(408) 523-1000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing price of the Common
Stock reported on the National Association of Securities Dealers, Inc. Automated
Quotation (Nasdaq) National Market was $54,625,396 as of May 31, 1997.(1)
The number of shares of Common Stock outstanding as of May 31, 1997 was
16,932,279.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated on or about June 20, 1997 to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held July 31, 1997 are incorporated by reference into Part III.
(1) Excludes 1,394,278 shares of Common Stock held by directors, officers and
affiliates as of May 31, 1997.
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GLOBAL VILLAGE COMMUNICATION, INC.
ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997
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INDEX PAGE
[PART 1 GRAPHIC]
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Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
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[PART 2 GRAPHIC]
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Item 5. Market for the Registrant's Common Equity and Related Stockholder 17
Matters
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and 18
Results of Operations
Item 8. Consolidated Financial Statements and Supplementary Data 25
Item 9. Changes in or Disagreements with Accountants on Accounting and 43
Financial Disclosure
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[PART 3 GRAPHIC]
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Item 10. Directors and Executive Officers of the Company 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
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[PART 4 GRAPHIC]
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Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 44
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[PART 1 GRAPHIC]
ITEM 1. BUSINESS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended March 31,
1997. This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1934, as amended. Actual results could
differ materially from those anticipated in forward-looking statements as a
result of risks identified and the other cautionary disclosures set forth below
and elsewhere in this report.
Global Village Communication, Inc. ("Global Village" or the "Company") (founded
in June 1989 and incorporated in Delaware), is a leader in the design,
development and marketing of easy-to-use integrated communications products for
personal computers with Windows, Macintosh, OS/2 and DOS operating systems. The
Company's products enable mobile, home office and networked computer users in
small-to medium-sized organizations to access the Internet and information
services, connect to a remote organization's internal network, view personalized
Internet content and communicate efficiently with colleagues, customers and
suppliers.
The Company has in the past experienced and in the future may experience
significant fluctuations in annual and quarterly operating results that may be
caused by many factors including, among others, the introduction or enhancement
of products by Apple Computer, Inc. ("Apple"), IBM-compatible personal computer
(PC) manufacturers, the Company or its competitors; the sales rates of Apple
Macintosh personal computers and PCs; the size and timing of individual orders;
market price reductions; market acceptance of new products and technology;
introductions of new technologies or standards; seasonality of revenues;
customer order deferrals, accelerations, and payments of accounts receivable in
anticipation of new products; changes in the Company's operating expenses;
performance of the Company's distributors and suppliers; mix of products sold;
quality control of the Company's products; and general economic conditions. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
Moreover, the industry in which the Company competes generally is subject to
short product life cycles. In this regard, the Company traditionally has
experienced a reduction in the average selling prices of its products as the
time from product introduction elapses. The Company recently has instituted
significant price reductions with respect to substantially all of its products
and expects that competitive pressures will continue to necessitate price
reductions. This is illustrated by the decline in the suggested retail price of
the Company's TelePort Platinum product from $171 to $139 during the 1997 fiscal
year. In particular, the Company expects the trend of reduced average selling
prices for its individual use products to continue during fiscal 1998. There can
be no assurance that the trend of reduced average selling prices will not
accelerate during fiscal 1998.
Unit sales volumes and market share of Macintosh compatible computers have
declined over the past year. The Company expects that revenues and/or gross
margins from its products for the Apple Macintosh family could remain flat or
decrease in future periods, which would have a material adverse effect on the
Company's business and results of operations unless the Company can generate
sufficient revenues from its communication server products or recently
introduced Windows personal-use products to compensate for any shortfall in
revenues from its Apple products.
In May 1997, the Company introduced four new 56 Kbps modem products, two of
which operate utilizing the Windows operating system. The market for personal
use modems is mature and highly competitive. Most of the Company's competitors
have greater financial resources, brand recognition and
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marketing strength than Global Village. The successful introduction of new
products often requires companies to dramatically increase sales and marketing
activities in advance of, as well as during, the product launch. The Company's
financial condition has constrained its ability to dramatically increase its
sales and marketing activities in advance of its introduction of its 56 Kbps
line of products. In addition, the standards process governing interoperability
among 56 Kbps modems is not complete. In the interim, consumers must choose from
among multiple non-interoperable implementations and anticipate the need to
upgrade or replace those modems to comply with the emerging standard for
interoperability or defer purchasing modems until the standards are established.
Therefore, there can be no assurance that the Company's newly released products
will be accepted by the marketplace. If the Company's sales of such products are
below its expectations, the Company's business, financial condition and results
of operations will be materially adversely affected.
During the year ending March 1996, the Company operated four major divisions:
the Communication Systems Division, the Communication Software Division, the
ISDN Division, and the GlobalCenter Internet Services Division.
In April 1996, the Company announced that it had incorporated its Internet
Services Division as a standalone business called GlobalCenter, Inc. At the same
time, the Company announced that UUNET Technologies, Inc. had acquired an equity
interest in GlobalCenter, Inc. At that time, the Company no longer had the
ability to exercise significant control over GlobalCenter. Accordingly, the
Company no longer consolidated the results of GlobalCenter and began to account
for its investment using the equity method of accounting. As a result of the
refinancing and operating performance of GlobalCenter during the first quarter
of fiscal 1997, the Company recorded an investment loss of $2.2 million and
reduced the book value of its investment to zero. In December 1996, GlobalCenter
entered into a definitive merger agreement whereby GlobalCenter and
Phoenix-based Primenet Services for the Internet, Inc. merged, reducing the
Company's percentage ownership below 10%. Accordingly, in the third quarter of
fiscal 1997, the Company began accounting for its investment in GlobalCenter
using the cost method of accounting. The Company's investment balance as of
March 31, 1997 remains zero.
In December 1996, the Company announced a restructuring plan aimed at restoring
profitability, stabilizing the balance sheet, and regaining market focus. This
plan was necessitated by a sharp reduction in PowerPort revenues as a result of
Apple's minimal unit volume shipments of PowerBooks following a repair program
announced in May 1996, by a reduction in TelePort revenues, and by disappointing
performance of the Company's newly released NewsCatcher and Focal Point
products. The Company recorded a restructuring charge of $1.3 million related
primarily to severance costs, write-offs of fixed assets and purchased software
technology and a lease abandonment.
As a result of these changes in the Company's business in fiscal 1997, the
Company was consolidated into a single products organization from the previous
divisional structure.
During fiscal 1997, a substantial majority of the Company's revenue was
attributable to sales of Apple Macintosh compatible versions of its TelePort
product line, and the Company expects that sales of these products will account
for a majority of its revenue for the foreseeable future. The Company's future
financial performance will depend in part on the successful development,
introduction and customer acceptance of new and enhanced versions of its
TelePort products as well as the Company's ability to generate increased sales
of Windows-compatible versions of TelePort or other products. Though the Company
continually seeks to further enhance its product offerings and to develop new
products, there can be no assurance that these development efforts will result
in enhanced or new products being introduced on a timely basis, or that any such
product enhancements or new products will achieve market acceptance. In
addition, the announcement by the Company of new products with the potential to
replace current products may cause customers to defer purchasing the Company's
current products which could
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have a material adverse effect on the Company's results of operations. While the
Company writes off inventory that it considers to be excessive or obsolete,
there can by no assurance that the Company's recorded allowances for such
write-offs and returns will be adequate, and a material increase in such
write-offs and returns over historical rates would have a material adverse
effect on the Company's results of operations.
TECHNOLOGY AND PRODUCTS
Global Village produces modems, telecommunications servers, and proprietary
communications software for two customer groups of the communications
marketplace: individual users and network users.
The Company's individual-use system products include TelePort modems for
Macintosh and Windows desktop computer users, PowerPort modems for Macintosh
PowerBook computer users, and NewsCatcher, a wireless information display
accessory for desktop Windows users. The Company's modem and wireless products
for Macintosh and Windows based personal computers are characterized by a highly
integrated, proprietary software and hardware design which makes computer
communications easy for the average user.
The Company's line of network products includes FaxWorks Server NT and FaxWorks
Pro LAN, software for providing fax services to office workgroups utilizing
Windows NT, Windows 3.1, and OS/2 operating systems. The OneWorld series of
telecommunication server systems for Macintosh provides shared fax, dial-out
modem, and remote network access capabilities to small workgroups.
The Company's core software technologies, FaxWorks communications software for
Windows, OS/2 and DOS operating systems, GlobalFax communications software for
Macintosh systems, and embedded software underlying Global Village's server
systems, provide a consistent, user-friendly interface across individual and
network product lines. For Windows, the Company also provides integrated
communication software to original equipment manufacturers (OEMs).
COMMUNICATIONS SYSTEMS FOR INDIVIDUALS
The Company continues to develop new additions to its TelePort and PowerPort
modem product lines. In fiscal 1997, Global Village introduced higher speed 33.6
Kbps modems and new TelePort models with proprietary speakerphone and voice
messaging features for Macintosh and Windows users. In May 1997, the Company
released four new 56 Kbps modems and broadened its Windows modem product line.
For the Macintosh modem market, Global Village announced support for both
k56flex and x2 technologies.
The Company's Macintosh modems feature GlobalFax software. Its Windows modems
feature the Company's FaxWorks communications software. Both software packages
support fax, Internet, and (for speakerphone models) telephony, voice messaging,
and speakerphone functions. Speakerphone units are usable as standalone
speakerphones even when the computer is powered off.
Global Village's PowerPort Platinum Pro, PowerPort Platinum, and PowerPort Gold
PC Card modems all provide easy to use communications capabilities for users of
Macintosh PowerBook notebook computers.
Targeted toward users who require instant electronic communication, the TelePort
and PowerPort products provide a solution for connecting to on-line services and
the Internet, accessing bulletin board services and using remote network access.
In fiscal 1997, Global Village released NewsCatcher, a unique wireless product
using "push" technology and a nationwide paging network to bring personalized
information to the desktop of individuals who rely on modems for connection to
the Internet. NewsCatcher is compatible with Windows 95 desktop systems.
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The following table shows the Company's major communications systems products
for individual users:
INTEGRATED COMMUNIIC. FOR INDIVIDUAL USERS
TELEPORT MODEMS FOR WINDOWS DESKTOP COMPUTERS
TelePort 56 ISA
(56,000 bps data, 14,400 bps send/receive-fax modem, x2 technology, Internal)
TelePort 56 External
(56,000 bps data, 14,400 bps send/receive-fax modem, x2 technology, External)
TelePort 33.6 Speakerphone
(33,600 bps data, 14,400 bps send/receive fax external modem, with standalone
speakerphone)
TELEPORT MODEMS FOR MACINTOSH DESKTOP COMPUTERS
TelePort 56 x2 technology
(56,000 bps data, 14,400 bps send/receive-fax modem, x2 technology)
TelePort 56 k56flex technology
(56,000 bps data, 14,400 bps send/receive-fax modem, k56flex technology)
TelePort Speakerphone Edition
(33,600 bps data, 14,400 bps send/receive-fax modem, with standalone
speakerphone and voice messaging)
TelePort Internet Edition
(33,600 bps data, 14,400 bps send/receive-fax modem)
TelePort Platinum
(28,800 bps data, 14,400 bps send/receive-fax modem)
POWERPORT INTERNAL MODEMS FOR MACINTOSH POWERBOOK
NOTEBOOK COMPUTERS
PowerPort Platinum Pro PC Cards
(28,800 bps data, 14,400 bps send/receive fax modem, 10Base-T ethernet
connector)
PowerPort Platinum PC Cards
(28,800 bps data, 14,400 bps send/receive fax modem)
WIRELESS INFORMATION SYSTEMS
NewsCatcher for Windows 95 desktop systems
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TELECOMMUNICATION SERVERS FOR WORKGROUPS
For small and medium-sized organizations, the Company offers FaxWorks Pro LAN
and FaxWorks Server NT fax server software for use in Windows, OS/2, and Windows
NT environments. FaxWorks integrates advanced fax software features into a
single user interface, allowing users to send and receive faxes directly from
their computer on the network.
The Company's OneWorld line of server appliances for Macintosh networks provides
complete, easy-to-use communication solutions for workgroups. The OneWorld Combo
server features fax, remote access, and network modem capabilities, giving each
user on a Macintosh network the ability to send and receive faxes and dial out
to on-line services or bulletin board systems. OneWorld Combo is also a complete
Apple Remote Access 1.0/2.0 server that allows offsite Macintosh users to
connect to their company
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network from virtually any location. OneWorld Fax includes both fax and network
modem capabilities, and OneWorld Network Modem provides network modem
capabilities. All servers can be upgraded to add additional capabilities.
These network server products offer shared facilities for a workgroup and
eliminate the need to install dedicated telephone lines for each individual
workstation in the office. In addition, the products can be administered from
any network-connected computer, including wide area network sites and remote
computers, and allow an administrator to update the operating programs stored in
flash memory from anywhere on the network. The products accommodate the
Company's PowerPort modems so that the entire server fits within a single
enclosure and requires only a single power source.
The following table shows the Company's major workgroup server products:
COMMUNICATIONS SERVERS FOR WORKGROUPS
ONEWORLD SERIES TELECOMMUNICATION
SERVERS FOR MACINTOSH NETWORKS
OneWorld Network Modem
(network modem server for Ethernet and LocalTalk networks)
OneWorld Fax
(network fax modem server for Ethernet and LocalTalk networks)
OneWorld Combo
(network modem, fax, and ARA 1.0/2.0 server for Ethernet and LocalTalk networks)
FAXWORKS PRO LAN SERVER SOFTWARE
FaxWorks Server NT
FaxWorks Pro LAN for Windows
FaxWorks Pro LAN for OS/2
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FOCAL POINT AND FAXWORKS SOFTWARE FOR INDIVIDUALS
In the fourth quarter of fiscal 1996, the Company introduced Focal Point
integrated communications software, providing Windows-based computer users with
an easy way to streamline their communications. Focal Point turns the PC into a
central communication center bringing together fax, data, e-mail, Internet,
voice mail, speakerphone and paging capabilities in a single interface. The
first truly integrated Windows communication software program, Focal Point is
ideally suited for users in small or home offices and for mobile professionals
who need an easy and efficient way to communicate with customers, suppliers, and
associates.
The Company also offers FaxWorks communications software to users of computers
running Windows, OS/2 or DOS operating systems and licenses FaxWorks to original
equipment manufacturers (OEMs).
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The following table shows the major products in the Company's Focal Point and
FaxWorks software product line:
INTEGRATED COMMUNICATIONS SOFTWARE--PC USERS
Focal Point for Windows 3.1 and Windows 95
FaxWorks for Windows
FaxWorks Pro for OS/2
FaxWorks 3.0 for DOS
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SALES AND MARKETING
Sales Consistent with industry practice, the Company distributes its products
through a worldwide system of distributors, dealers, system integrators, OEMs
and mail order houses. The Company's two largest customers accounted for
approximately 21% and 11%, respectively, of the Company's net revenue in fiscal
1997. The Company's largest customer accounted for approximately 33% of net
revenue in fiscal 1996. Accordingly, the Company relies significantly on these
sales and their subsequent resales.
Many of the Company's distributors carry multiple product lines and could reduce
their support of the Company's products in favor of a competitor's products or
for any other reason. The loss of any of the Company's major distributors would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's agreements with its distributors
contain right of return privileges for stock balancing, non-salable products and
discontinued products. Therefore, the Company is exposed to the risk of product
returns from distributors and direct reseller customers. There can be no
assurance that the Company's recorded allowances for returns will be adequate
and a material increase in returns over historical rates would have a material
adverse effect on the Company's results of operations.
In addition, the Company is subject to the risk that its inventories may rapidly
become obsolete or that the Company may carry quantities of certain products
that exceed current or projected demand. While the Company reserves for
inventory that it considers to be excess or obsolete, there can be no assurance
that the Company's recorded allowances for such write-offs and returns will be
adequate, and a material increase in such write-offs and returns over historical
rates could have a material adverse effect on the Company's results of
operations.
The Company sells products to certain computer manufacturers for inclusion in
certain of their systems. Apple Computer, Power Computing, and UMAX purchase
Macintosh modems as hardware/software components. In addition, Global Village
has licensing agreements with Gateway 2000, Dell, Megahertz and others for
shipment of Global Village software with their modems and systems.
International sales represented approximately 15%, 19%, and 11% of the Company's
net revenue in fiscal 1997, 1996, and 1995, respectively. The Company utilizes
distributors in Europe, the Middle East, Australia and Asia. There can be no
assurance that the Company will be able to maintain or increase international
demand for the Company's products or that the Company's distributors will be
able to effectively meet that demand. Global Village generally requires its
distributors to commit to a minimum sales volume and to provide local support,
marketing and sales coverage for their specific territory. In addition to
regulatory approval requirements, each country has local competitors with
significant market
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share. In January 1995, the Company created a European subsidiary, Global
Village Communication Europe B.V. to support its distribution channels in the
sale, marketing and support of its products.
Additional risks inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international distributors, potentially adverse tax consequences, repatriation
of earnings, the burdens of complying with a wide variety of foreign laws and
changes in demand resulting from fluctuations in exchange rates. In addition,
the laws of certain foreign countries do not provide protection for the
Company's intellectual property to the same extent as do the laws of the United
States.
Because the Company generally ships products within a short period after receipt
of an order, the Company does not usually have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. The Company's expense levels are based in part on its
expectations as to future revenues. Therefore, the Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall of demand in relation to the
Company's expectations or any material delay of customer orders would have an
almost immediate adverse effect on the Company's results of operations.
Fluctuations in operating results may also result in volatility in the price of
the Company's Common Stock.
Marketing The Company complements its sales activities with a range of public
relations and advertising programs designed to stimulate customer demand. The
Company believes that reviews and comments by influential trade press, business
press, market analysts and user group leaders have a pronounced impact on demand
for the Company's products. The Company conducts regular product strategy
briefings and new product previews. Historically, the Company has enjoyed strong
support from the trade press and has received numerous awards for its products.
Recent awards and accolades include PC Magazine's "Best Internet Tool of the
Year" (January 1997) and Windows Sources "Stellar Product Award" (December 1996)
for NewsCatcher, PC Magazine's "Editor's Choice Award" (February 1997) and
Mobile Computing & Communications' "First Class Award" (February 1997) for Focal
Point, ComputerLife's "Five Stars" (March 1997) for TelePort 33.6 Speakerphone
modem for Windows, MacHome Journal's 1996 Annual Reader's Choice, Modem category
(February 1997) for TelePort and GlobalFax Software, two MacWorld's "Editor's
Choice Awards" (July 1996) for TelePort Platinum and PowerPort Platinum PC Card
in independent contests, American Facsimile Association's 1996 "Best PC Card
Fax/Modem Award" for PowerPort Platinum Pro PC Card, PC World "Best Buy" and
OS/2 Magazine "Editors' Choice" awards for FaxWorks Pro, Byte Magazine's
"Product Excellence Award" for One World Fax, Windows NT Magazine's "Editors'
Choice Award" for FaxWorks Server for Windows NT, and Windows Magazine's
"Recommended Product List" for Focal Point.
From time to time, the Company makes certain upgrade offers to its customers,
for example to take advantage of greater speed or increased functionality
through new additions to its communications product line. The Company also
markets add-on products and convenience items directly to its installed base of
customers. However, such sales do not currently constitute a significant portion
of the Company's business.
Global Village has worked with OEMs such as Apple, Power Computing, Dell,
Gateway 2000, IBM and Packard Bell throughout the Company's product development
process and has developed a working relationship with them, which includes
sharing of information, product sales, and licensing technology. The Company
currently has several agreements with OEMs encompassing development and
licensing of certain technology. See "Proprietary Rights." The Company seeks to
continue to develop these relationships in order to better anticipate new
technologies and understand the needs of their installed user bases. The OEMs
are not contractually obligated to continue information sharing activities with
the
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Company and could discontinue such activities at any time. In addition, the OEMs
are not contractually obligated to renew licenses with the Company or purchase
the Company's products. In general, the OEMs also collaborate with other vendors
of communications products that compete with the Company's products.
A substantial majority of the Company's sales to date have been derived from
products designed for use with the Apple Macintosh family of personal computers,
including the Macintosh desktop series of computers and the PowerBook series of
portable computers. Therefore, the Company is substantially dependent on the
sale of Apple Macintosh computers and the development and sale of new Apple
computers. Due to expected continuing pricing pressures, reduced Macintosh unit
sales, and new product introductions by the Company's competitors, the Company
expects that revenues and/or gross margins from its products for the Apple
Macintosh family could remain flat or decrease in future periods, which would
have a material adverse effect on the Company's business, financial condition,
and results of operations unless the Company can generate sufficient revenues
from its Windows-based and other products to compensate for any shortfall in
revenues from its Apple products. The market for personal computers is extremely
competitive and rapidly changing. Apple's Macintosh system unit volumes have
declined in recent periods and its Macintosh market share has fallen. Company
revenues from the Apple Macintosh compatible products may decline in future
periods. There can be no assurance that personal computers competing with the
Apple Macintosh family of computers will not displace Macintosh products as such
personal computers are enhanced in their functionality, evolve to support
technologically superior applications or otherwise become economically more
attractive. Although the Company now has solutions on a broader array of
computing platforms, there can be no assurance as to the market acceptance of
those solutions.
Apple in the past has experienced difficulty in making the transition associated
with the development, manufacturing, marketing and sale of certain new
computers. The transition to any new generation of products would subject the
Company to the risks associated with such transitions, including the risk that
(i) potential customers will defer purchases of current products as a result of,
among other things, speculation or premature announcements about new products;
(ii) the new products will not be successfully received in the marketplace; and
(iii) Apple will be unable to adequately meet demand for the new products. The
inability of Apple to successfully develop, manufacture, market, sell or make
the transition to new products could have a material adverse effect on the
Company's results of operations. In addition, sales of the Company's products in
the past have been adversely affected by the announcement by Apple of new
products with the potential to replace existing products. Any decrease in the
sales of the Apple Macintosh family of computers could have an immediate and
material adverse effect on the Company's results of operations. For example, in
May 1996, the Company announced that its current quarter had being adversely
impacted by Apple Computer's recently announced repair program for Macintosh
PowerBook 5300 and 190 models.
Additionally, any time one of the Company's OEM customers makes a transition to
a new machine or architecture, there are risks of compatibility and
interoperability problems, that, if severe enough, could materially, adversely
impact the Company's sales and customer satisfaction.
The Company provides a five-year warranty on its personal products and a
three-year warranty on its server products, which provide for the repair or
replacement of products determined to be defective. Therefore, the Company is
exposed to the risk of product returns from distributors, direct resellers and
end-user customers.
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COMPETITION
The market for the Company's products is intensely competitive and is
characterized by rapidly changing technology, evolving industry communication
standards and frequent new product introductions. A number of competitors,
including U.S. Robotics, Diamond Multimedia, Hayes, Shiva, Zoom, and 3Com, among
others, offer products that compete with one or more of the Company's products.
Other companies in the personal computer industry, such as modem vendors, remote
access server vendors, communication software vendors, microprocessor and chip
set suppliers, fax machine manufacturers and personal computer manufacturers,
could seek to expand their product offerings by designing and selling products
using competitive technology that could render obsolete or have a material
adverse effect on sales of the Company's products.
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. In addition, the
market for the Company's products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from its current competitors. Accordingly, there can be no assurance
that the Company will be able to provide products that compare favorably with
the products of the Company's competitors or that competitive pressures will not
require the Company to further reduce its prices. Any material reduction in the
price of the Company's products could negatively affect gross profit as a
percentage of net revenue and could require the Company to increase unit sales
in order to maintain net revenue. There can be no assurance, however, that the
Company would be able to increase its unit sales or maintain its present level
of net revenue. Any failure to so increase unit sales or maintain the Company's
net revenue would have a material adverse effect on the Company's financial
condition and results of operations.
Apple currently offers products that compete directly or indirectly with the
Company's products and can be expected to introduce additional competitive
products in the future. Apple currently bundles modems and communications
software with certain of its computers, and the Company anticipates that Apple
will
continue to bundle such products in the future. In addition, Apple may further
enhance communications functionality within its desktop or portable computers.
Any such additional bundling or enhancement by Apple would have a material
adverse effect on the Company's financial condition and results of operations.
The Company's OneWorld fax server products compete primarily with stand-alone
fax machines, electronic mail, centralized fax systems produced by independent
manufacturers such as 4Sight, Cypress, and STF, as well as printer vendors,
including Apple and NEC, which offer fax capabilities with some of their
products. The Company's OneWorld Combo server competes with the same products in
the fax server category, as well as with remote access server products produced
by competitors such as Shiva, 3Com, and others.
Focal Point and FaxWorks, the Company's integrated communications software for
computers running Windows, faces competition from Symantec, Quarterdeck, and
Smith Micro. Of those competitors, Symantec has an approximately 75% share of
the fax software market. In the OEM software market, the primary competitor is
Smith Micro. In the network fax server segment, competitors include Cheyenne,
Optus, Rightfax and many smaller vendors.
Global Village's NewsCatcher product competes indirectly with alphanumeric pager
based information services and with wired alternatives for accessing news
summaries using personal computers. Competitors in this segment include
PointCast, Individual Inc., and others.
11
<PAGE> 12
PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company has no patents or patent applications
pending. The Company seeks to protect its hardware, software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. The Company seeks to protect its brand names under trademark
and unfair competition laws. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
The Company believes that, due to the rapid pace of innovation within the
communications software industry, the Company's success in establishing and
maintaining a technological leadership position is likely to depend more upon
the technological and creative skills of its personnel, continued innovation,
its marketing skills and customer support than on the various legal means of
protecting its existing technology.
The Company licenses software from Apple and from other OEMs and incorporates
such software into its products. Generally, such agreements grant the Company
non-exclusive, worldwide licenses with respect to the subject software and
terminate on varying dates. For example, the Company licenses software from The
Keller Group for its OS/2 software. A royalty is paid using a percentage of
revenue on the OS/2 stand alone products and network servers. In addition, new
communications technologies may be developed or the Company's products may be
modified so as to require licenses that the Company may not be able to obtain on
reasonable terms or at all.
The Company is aware of products in addition to its own that are marketed under
the trademarks "PowerPort," "TelePort," "GlobalFax," "Focal Point," and
"OneWorld." The Company also is aware of a company that operates under and has a
trademark for the name "Global Villages" and provides computer-related services.
There can be no assurance that litigation with respect to these trademarks will
not be instituted by any third parties. If any such litigation were successful,
the Company could be required to pay damages and cease all use of a particular
trademark. There can be no assurance that any loss of the right to use a
trademark would not reduce sales of the Company's products. In any event, even
if the Company were successful in any such litigation, the legal and other costs
associated with such litigation could be substantial. As is customary in the
Company's industry, the Company from time to time receives communications from
third parties asserting that the Company's products infringe, or may infringe,
the proprietary rights of third parties or seeking indemnification against such
infringement. There can be no assurance that any such claims would not result in
protracted and costly litigation. The Company anticipates that the duration of
its trademarks will be perpetual.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily focused on software
development, hardware development, and systems integration. The Company's
expenditures for research and development were $12.0 million, $14.6 million and
$8.8 million for the fiscal years ended March 31,
12
<PAGE> 13
1997, 1996 and 1995, respectively. Customer-sponsored research and development
was immaterial during these periods.
The market for personal computer communications products is characterized by
continual change and improvement in hardware and software technology resulting
in short product life cycles. The Company believes that its future success will
depend on its ability to enhance its current products, develop new products on a
timely and cost-effective basis that meet changing customer needs and respond to
emerging industry standards and other technological changes. In particular, the
Company must adapt its products to the evolving technological standards of the
various computer platforms and new technical standards resulting from increases
in data transmission speed and wireless communication. Any failure by the
Company to anticipate or respond adequately to changes in technology and
customer preferences or any significant delay in product development or
introduction would have a material adverse effect on the Company's results of
operations. Due in part to the factors described above, the Company is subject
to the risk that its inventories may rapidly become obsolete or that the Company
may carry quantities of certain products that exceed current or projected
demand. While the Company writes down inventory that it considers to be excess
or obsolete, the Company has in the past recorded inventory write-offs in excess
of previous write downs. There can be no assurance that the Company's recorded
allowances for such write-offs will be adequate in the future, and material
write-offs could have a material adverse effect on the Company's results of
operations and working capital. In addition, products as complex as those
offered by the Company may contain undetected errors or defects when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products after commencement of commercial shipments
resulting in a delay in market acceptance or a recall of such products.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of turnkey managers,
program managers, quality assurance, packaging and shipping personnel. For a
majority of its hardware assemblies, the Company purchases fully manufactured
and tested units from CMC, a "turnkey" manufacturing subcontractor. Components
and manufacturing services from the Company's suppliers are obtained on an
as-needed basis. The Company believes that there are a number of alternative
contract manufacturers that could produce the Company's products. However, it
could take a significant period of time and result in significant additional
expense to qualify an alternative subcontractor and commence manufacturing in
the event of a reduction or interruption of production. Therefore, the Company
is highly dependent, on a short-term basis, on its continued relationship with
its "turnkey" manufacturing subcontractor and any reduction, interruption, or
termination of this relationship could have a material adverse effect on the
operating results of the Company.
The Company is dependent on sole or limited source suppliers for certain key
components used in its products, particularly chip sets designed and
manufactured by Rockwell International and Texas Instruments. The Company
generally purchases sole or limited source components pursuant to purchase
orders placed from time to time in the ordinary course of business and has no
guaranteed supply arrangements with its sole or limited source suppliers.
Certain component suppliers, such as Rockwell, are also modem manufacturers and,
accordingly, could elect to satisfy their internal supply requirements rather
than the Company's purchase requirements. The Company at times in the past has
experienced delays in product development and difficulties in manufacturing
sufficient product to meet demand due to the inability of certain suppliers to
meet the Company's volume and schedule requirements. There can be no assurance
that the Company's suppliers will be able to meet the Company's requirements for
key
13
<PAGE> 14
components and failure to meet such requirements in the future could have a
material adverse effect on the Company's results of operations.
Because the Company generally ships products within a short period after receipt
of an order, the Company does not usually have a material backlog of unfilled
orders. The Company's inventory purchases are based in part on its expectations
as to future orders. Therefore, the Company may be unable to reduce parts orders
in a timely manner to compensate for any unexpected product orders shortfall.
Accordingly, any significant shortfall of demand in relation to the Company's
expectations or any material delay of customer orders could have a material
adverse effect on the Company's financial condition and results of operations.
SOFNET
In August 1994, the Company acquired SofNet, a supplier of fax software for PCs
running Windows, OS/2 or DOS. In fiscal 1996, Global Village relocated SofNet's
telesales operation to the Company's headquarters in Sunnyvale, California. In
fiscal 1997, the Company relocated most of the remaining SofNet operations to
Sunnyvale and refocused emphasis from the development of communications software
for OEMs and consumers to the production of communications server software and
Windows-based communications systems for sale under the Company's name and
through retail, VAR, and direct channels. There can be no assurance that the
Company will not experience difficulties in connection with the transition of
its SofNet operations to Sunnyvale.
KNX LIMITED
In January 1996, the Company acquired KNX Limited, a UK-based provider of ISDN
remote access products. KNX's products served two distinct markets: Its ISDN
branch office router served large organizations wishing to extend the
organizational network infrastructure to remote offices. KNX's personal product
line, primarily ISDN terminal adapter cards, served consumers who sought higher
speed connections to the Internet or to the office network.
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United Kingdom
(formerly, the Company's ISDN division). The disposition of the division has
been accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30 and prior period financial statements have
been restated to reflect the discontinuation of the enterprise network server
operation. The loss from discontinued operations of $1.8 million, $3.3 million
and $1.5 million in fiscal years 1997, 1996 and 1995, respectively, represents
the operation's operating losses. The loss on disposal of discontinued
operations of $2.2 million in fiscal 1997 represents the cost to dispose of the
operation (including estimated contingent liabilities of $2.0 million at March
31, 1997) net of $3.8 million of cash received from the sale of the operation's
assets to Mitel Telecom Limited. Global Village retained a royalty free license
for portions of KNX's ISDN technology and relocated a number of the KNX staff to
the Company's headquarters in Sunnyvale, California.
EMPLOYEES
As of March 31, 1997, the Company employed a total of 218 persons, including 82
in sales, marketing and customer support, 45 in operations, 67 in engineering
and product development and 24 in finance and administration. The Company had 2
employees located in Canada, and 1 employee in England, and 215 employees
located in the United States. None of the Company's employees are represented by
a labor union or are subject to a collective bargaining agreement. The Company
believes that its relations with its
14
<PAGE> 15
employees are good. The Company's future success depends to a significant extent
on its senior management and other key employees, including key development
personnel. The loss of the services of any of these individuals or group of
individuals could have a material adverse effect on the Company's results of
operations. The Company has no employment agreements with any of its key
employees. The Company also believes that its future success will depend in
large part on its ability to attract and retain additional key employees.
Competition for such personnel in the computer industry is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company and their ages as of March 31,
1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Neil Selvin 43 President, Chief Executive Officer and
Director
Leonard A. Lehmann 42 Chairman of the Board
John M. Peterson 52 Vice President, Finance, Chief Financial
Officer and Secretary
James Brown 42 Vice President, Operations
Charles R. Oppenheimer 38 Vice President and General Manager, Products
Group
Jack Battaglia(1) 52 Vice President, Sales
Marsha Raulston 48 Vice President, Customer Satisfaction and
Human Resources
Marc Linden 36 Vice President of New Business Development
</TABLE>
(1) Jack Battaglia joined the company in April 1997.
Neil Selvin has served as President and Chief Executive Officer and director of
the Company since March 1993. From February 1990 to March 1993, he was Director
of Marketing at Apple Computer for the PowerBook product family and prior to
that for Apple's peripherals product line. From 1985 to 1990, Mr. Selvin was
employed by Ampex Corporation, a manufacturer of electronics products, most
recently as Chief Operating Officer of its Video Systems division and also as
business unit general manager and in several marketing management positions.
Prior to joining Ampex Corporation, Mr. Selvin held marketing, sales and
technical management positions at Varian Associates and Apollo Lasers. Mr.
Selvin is also a director of two privately held corporations, GlobalCenter, Inc.
and AirMedia, Inc. Mr. Selvin received a B.A. in physics and mathematics from
Pomona College, an M.S. in physics from Brown University, and an M.B.A. from
Harvard Business School.
Leonard A. Lehmann has served as Chairman of the Board of the Company since its
founding in June 1989. From January 1993 to March 1996, Mr. Lehmann served as
Vice President, Advanced Products and evaluated new technologies and performed
strategic planning for the Company. From March 1992 to January 1993, he served
as Vice President, Engineering of the Company. From June 1989 to March 1992, he
served as the Company's Chief Executive Officer. Mr. Lehmann was also a founder
of DigiRad Corporation, a medical imaging company, and GreenSpring Computers,
Inc., an industrial computer manufacturer. Mr. Lehmann received a B.S. in
electrical engineering from Cornell University, and an M.S. and a Ph.D. in
electrical engineering from Stanford University.
John M. Peterson became the Company's Vice President, Finance, and Chief
Financial Officer and Secretary in March 1997. From 1988 to 1995, Mr. Peterson
was Chief Financial Officer and Vice President of Finance and Administration at
Calera Recognition Systems. From 1984 to 1988, he was the Senior Vice President
and Chief Financial Officer at E-H International. Previously, Mr. Peterson
worked for Atari, Inc. where he held several key management positions. Mr.
Peterson received a B.S. in accounting at San Jose State University, and is a
certified public accountant in the State of California.
15
<PAGE> 16
James Brown became the Company's Vice President, Operations in January 1994.
From September 1990 to January 1994, Mr. Brown was employed by Apple Computer,
most recently as Director of World-Wide Consumables Business and also as
Director of World-Wide Imaging Operations. From 1985 to 1990, he was employed by
Ampex Corporation in various management positions in operations. Mr. Brown
received a B.S. in Behavioral Sciences and Economics from George Williams
College.
Charles R. Oppenheimer became the Company's Vice President and General Manager,
Mac Division in October 1994. He previously served as Vice President, Marketing
of the Company beginning in July 1993. From 1984 to July 1993, Mr. Oppenheimer
was employed by Apple Computer, most recently as Director of System Software
Marketing and also as manager of System Software Marketing and manager of
Macintosh Product Marketing. Mr. Oppenheimer received a B.S. in computer science
from Union College, and an M.B.A. from The Wharton School.
Jack Battaglia became the Company's Vice President of Sales in April 1997. From
April 1996 to April 1997, Mr. Battaglia was Vice President of Sales-Americas of
Syquest Technology, a manufacturer of removable hard drives for computers. From
May 1995 to April 1996, he was employed by Beau Vallon Group Technology
Consultants. From 1969 to 1995, Mr. Battaglia held various senior sales and
marketing management positions with Memorex Brand Consumer Products. Mr.
Battaglia attended Long Beach State University.
Marsha Raulston became the Company's Vice President, Customer Satisfaction in
January 1994 and, in January 1997, also assumed responsibility for Human
Resources. From October 1991 to January 1994, Ms. Raulston was Vice President of
Customer Service of Intuit, a personal finance software company. From June 1987
to October 1991, Ms. Raulston served as Corporate Coordinator, Quality of Work
Life at American Airlines, Inc., and, prior to that, she worked for the Citicorp
Diners Club Inc., a credit card issuer. Ms. Raulston holds a B.A. in psychology
from Stephens College in Columbia, Missouri and an M.A. in sociology from the
University of Nottingham in Nottingham, England.
Marc Linden became the Company's Vice President of New Business Development in
June 1996. From October 1992 to June 1996, Mr. Linden was Director of Business
Development and Planning of Octel Communications, a voicemail equipment
manufacturer. From 1987 to 1992, he was employed as a consultant with McKinsey &
Co. Mr. Linden received a A.B. in Economics from the University of California
Berkeley, and an M.B.A. from Harvard Business School.
ITEM 2. PROPERTIES
The Company leases approximately 128,000 square feet of office space for its
headquarters in Sunnyvale, California. This facility accommodates
administration, finance, sales, marketing, customer satisfaction, engineering,
and research and development. The lease expires in April 2000 and the monthly
rent is approximately $108,000. Approximately 64,835 square feet of this office
space is subleased at a monthly income of $85,000.
The Company's manufacturing and distribution operation consists of a 23,940
square foot facility in Plano, Texas. The lease expires in December 2002 and
monthly rent is approximately $9,975.
The Company also leases approximately 21,000 square feet of office space in
Marietta, Georgia. The lease expires in January 2000 and the monthly rent is
approximately $18,000. In May 1997, approximately 16,000 square feet was
subleased at a monthly income of $13,000. Also, the Company leases sales office
space at five other facilities, including three in the United States, one in
England and one in Canada.
16
<PAGE> 17
The Company believes the space to which it is committed is adequate for its
current needs and that additional space sufficient to meet the Company's needs
for the foreseeable future is available on commercially reasonable terms. The
Company's facilities are subject to a variety of environmental regulations. The
Company has incurred no significant expenses to date related to complying with
these regulations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in legal
proceedings from time to time. As of the date of this submission, there are no
material proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
[PART 2 GRAPHIC]
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following required information is filed as part of the report:
The Company has not paid cash dividends on its Common Stock. The Company's Stock
is traded over-the-counter and is quoted on the Nasdaq National Market under the
symbol "GVIL." The following table sets forth the range of high and low closing
sale prices for the Common Stock:
<TABLE>
<CAPTION>
Low Sale Price High Sale Price
-----------------------------------------------------------------------
<S> <C> <C>
Fiscal 1996
First Quarter $11.00 $17.00
Second Quarter 13.00 18.13
Third Quarter 10.25 24.13
Fourth Quarter 12.12 19.25
Fiscal 1997
First Quarter $ 8.25 $18.25
Second Quarter 5.88 9.50
Third Quarter 3.00 9.25
Fourth Quarter 1.06 3.56
</TABLE>
On March 31, 1997, there were approximately 391 holders of record of the
Company's Common Stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information for the years ended
March 31, 1993 through March 31, 1997 is derived from the Company's consolidated
financial statements, which have been audited by the Company's independent
auditors. The information set forth below is qualified by reference to and
should be read in conjunction with the Financial Statements and related notes
thereto and
17
<PAGE> 18
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this report.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In thousands, except per share data
STATEMENTS OF OPERATIONS DATA(A):
Net revenue $22,853 $46,637 $80,021 $136,941 $ 90,174
Income (loss) from operations 2,270 6,764 (3,239) 16,154 (42,029)
Income (loss) from continuing
operations 1,478 4,302 (6,206) 12,148 (35,852)
Loss from discontinued operations (499) (408) (1,466) (3,312) (4,029)
Net income (loss) $ 979 $ 3,900 $(7,672) $ 8,836 $(39,881)
Income (loss) per share:
Income (loss) from continuing
operations $ 0.12 $ 0.33 $ (0.41) $ 0.68 $ (2.13)
Net income (loss) $ 0.08 $ 0.30 $ (0.51) $ 0.49 $ (2.37)
Shares used in computing income
(loss) per share 12,403 13,127 15,013 17,872 16,835
BALANCE SHEET DATA:
Working capital $ 5,628 $27,011 $28,468 $ 36,402 $ (3,760)
Total assets 11,318 36,407 53,722 72,035 35,200
Total liabilities 4,445 7,269 17,587 24,204 27,850
Stockholder's equity $68,735 $29,138 $36,135 $ 47,831 $ 7,350
- ---------------------------------------------------------------------------------------------
</TABLE>
The selected consolidated financial data has been derived from, and should be
read in conjunction with, the related Consolidated Financial Statements.
(a) In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue the operations of its enterprise network server operation based
in the United Kingdom (formerly, the Company's ISDN Division). Therefore,
operating results for the ISDN Division are classified as discontinued
operations on the Company's Consolidated Statements of Operations, and all
periods have been restated accordingly.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
March 31, 1997. This report contains 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 results could
differ materially from those anticipated in forward-looking statements as a
result of the risks identified and the other cautionary disclosures set forth
below and elsewhere in this report.
Global Village Communication, Inc. ("Global Village" or "the Company"), is a
leader in the design, development and marketing of easy-to-use integrated
communications products and services for personal computer users with Windows,
Macintosh, OS/2 and DOS operating systems. The Company's products enable mobile,
home office, and networked computer users in small and medium-sized
organizations to communicate efficiently with colleagues, customers, and
suppliers.
18
<PAGE> 19
The Company in the past has experienced and in the future may experience
significant fluctuations in annual and quarterly operating results that may be
caused by many factors including, among others, the introduction or enhancement
of products by Apple Computer, Inc. (Apple), IBM-compatible personal computer
manufacturers, the Company or its competitors; the sales rates of Apple
Macintosh personal computers and PCs; the size and timing of individual orders;
market price reductions; market acceptance of new products and technology;
seasonality of revenues; customer order deferrals and accelerations in
anticipation of new products; changes in the Company's operating expenses;
performance of the Company's distributors and suppliers; mix of products sold;
quality control of the Company's products; and general economic conditions. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
The industry in which the Company competes is generally subject to short product
life cycles. In this regard, the Company traditionally has experienced a
significant reduction in the average selling prices of its products as the time
from product introduction elapses. In fiscal year 1997, the Company instituted
significant price reductions with respect to substantially all of its products
and expects that competitive pressures will continue to necessitate price
reductions. In particular, the Company expects increased competition for its
products for the Apple Macintosh family of personal computers to continue as a
number of companies continue to introduce modems for the Apple platform. There
can be no assurance that the trend of reduced average selling prices will not
accelerate during fiscal 1998.
In May 1996, Apple announced a repair program for its Powerbook 5300 and 190
laptop computers which was effectively a recall of defective Apple Macintosh
computers. As a result of the repair program, the Company experienced
significantly reduced sales of its PowerPort products, particularly, its
PowerPort PC cards. Sales of such products have not returned to the levels
achieved prior to Apple's announcement and the Company does not believe that it
will achieve such sales levels for the foreseeable future. The Company therefore
expects that revenues and/or gross margins from its products for the Apple
Macintosh family could decrease in future periods, which would have a material
adverse effect on the Company's business and results of operations unless the
Company can generate sufficient revenues and/or gross margins from products to
compensate for any shortfall in revenues from its Apple platform products. Any
price reduction or decrease in sales volume could have a material adverse effect
on the Company's results of operations.
Because the Company generally ships products within a short period after receipt
of an order, the Company typically does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. The Company's expense levels are based in part on its
expectations as to future revenues. Therefore, the Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall of demand in relation to the
Company's expectations or any material delay of customer orders would have an
almost immediate adverse impact on the Company's results of operations and
liquidity. Fluctuations in operating results may also result in volatility in
the price of the Company's Common Stock.
The Company's Apple Macintosh products are characterized by a highly integrated,
proprietary software and hardware design which makes computer communications
easy for the average user. For Windows, OS/2 and DOS operating systems, the
Company provides integrated communications software to original equipment
manufacturers (OEMs) such as Gateway and Dell Computers, and through other
distribution channels to end users. In addition, the Company has a wireless
Internet receiver that provides multimedia news, sports and weather information
direct to the desktop.
To date, a substantial majority of the Company's revenue has been attributable
to sales of its TelePort and PowerPort product lines (all of which are designed
around the Apple Macintosh family of computers),
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<PAGE> 20
and the Company expects that sales of these products will account for a majority
of its revenue for the foreseeable future. The Company's future financial
performance will depend in part on the successful development, introduction and
customer acceptance of new and enhanced versions of its TelePort and PowerPort
products, the Company's ability to successfully reduce or control various
operating expenses as well as the Company's ability to generate increased sales
of PC, or other products. Though the Company continually seeks to further
enhance its product offerings and to develop new products, there can be no
assurance that these development efforts will result in enhanced or new products
being introduced on a timely basis, or that any such product enhancements or new
products will achieve market acceptance. In addition, the announcement by the
Company of new products with the potential to replace current products may cause
customers to defer purchasing the Company's current products which could have a
material adverse effect on the Company's results of operations. As a result of
changing technology and market factors, the Company is subject to the risk that
its inventories may rapidly become obsolete or that the Company may carry
quantities of certain products that exceed current or projected demand. While
the Company has written down inventory that it considers to be excess or
obsolete, there can be no assurance that the Company's write downs will be
adequate, and a material increase in such write downs and returns over
historical rates would have a material adverse effect on the Company's results
of operations and working capital. There can be no assurance that the Company
will be successful in developing new products or enhancing its current products
on a timely basis, or that such new products or product enhancements will
achieve market acceptance.
The Company is dependent on sole or limited source suppliers for certain key
components and services used in its products particularly the modem chip sets
designed and manufactured by Rockwell International and Texas Instruments. The
Company has no guaranteed supply arrangements with its sole or limited source
suppliers. The Company at times in the past has experienced delays in its
ability to manufacture sufficient product to meet demand due to the inability of
certain suppliers to meet the Company's volume and schedule requirements. There
can be no assurance that any sole or limited source supplier will meet the
Company's volume and scheduling requirements in the future. Any failure of such
a supplier to meet such requirements could have a material adverse effect on the
Company's business and results of operations and working capital.
20
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship to net revenue of certain items in the Company's Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue 100% 100% 100%
Cost of revenue 89 57 54
- --------------------------------------------------------------------------------------
Gross profit 11 43 46
- --------------------------------------------------------------------------------------
Operating expenses:
Research and development 14 11 11
Marketing and sales 32 17 18
General and administrative 8 4 5
Restructuring costs 1 -- --
Loss from investment in GlobalCenter, Inc. 2 -- --
In-process research and development -- -- 16
- --------------------------------------------------------------------------------------
Total operating expenses 57 32 50
- --------------------------------------------------------------------------------------
Income (loss) from operations (46) 11 (4)
Other income, net 1 1 1
- --------------------------------------------------------------------------------------
Income (loss) before income taxes (45) 12 (3)
Provision for income taxes (benefit) (5) 3 5
- --------------------------------------------------------------------------------------
Income (loss) from continuing operations (40) 9 (8)
- --------------------------------------------------------------------------------------
Loss from discontinued operations (2) (2) (2)
Loss on disposal of discontinued operations (2) -- --
- --------------------------------------------------------------------------------------
Loss from discontinued operations (4) (2) (2)
- --------------------------------------------------------------------------------------
Net income (loss) (44)% 7% (10)%
- --------------------------------------------------------------------------------------
</TABLE>
NET REVENUE
Net revenue includes revenue from gross shipments, licenses and royalties, less
reserves for returns and allowances. Net revenue decreased to $90.2 million in
fiscal 1997 from $137.0 million in fiscal 1996. Net revenue increased to $137.0
in fiscal 1996 from $80.0 in fiscal 1995. The fiscal 1997 decrease in net
revenue is primarily attributable to Apple Computer's repair program for the
Macintosh PowerBook 5300 and 190 models and reduced shipments of other Macintosh
products. The repair program significantly reduced the number of Apple computers
available for the Company's products. The Company's products most impacted by
Apple's repair program were its PowerPort PC cards. The fiscal 1996 increase in
net revenue was primarily attributable to the introduction of PCMCIA modems, an
increase in international sales, and a general increase in volume of shipments
of Company's products through distribution channels.
21
<PAGE> 22
Aggregate returns and allowances have approximated 18%, 6% and 5% of gross
revenue for fiscal 1997, 1996 and 1995, respectively. The increase in fiscal
1997 is primarily due to returns and reserves associated with several slow
moving products.
International net revenue decreased to $13.3 million or 15% of net revenues in
fiscal 1997 from $25.7 million or 19% of net revenue in fiscal 1996.
International net revenue increased in fiscal 1996 from $8.9 million or 11% of
net revenues in fiscal 1995. The fiscal 1997 decrease in international net
revenue is primarily attributable to the decrease in the Company's sales in the
Asia region to Apple Japan. The fiscal 1996 increase in international net
revenue was due to a substantial OEM agreement with Apple Japan.
There can be no assurance that the Company will be able to maintain or increase
international demand for the Company's products or that the Company's
distributors will be able to effectively meet that demand. Risks inherent in the
Company's international business activities generally include unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing products for foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations and distributors,
potentially adverse tax consequences, repatriation of earnings, the burdens of
complying with a wide variety of foreign laws and changes in demand resulting
from fluctuations in exchange rates. In addition, the laws of certain foreign
countries do not provide protection for the Company's intellectual property to
the same extent as do the laws of the United States. Revenue reserves and
allowances are established for estimated future returns due to stock balancing
and discontinued and nonsaleable products based on the Company's past experience
and internal forecasts. There can be no assurance that the Company's historical
experience regarding returns and allowances will continue or that its
projections will prove accurate. If the Company experiences returns in excess of
its reserves, the Company's results of operations could be materially, adversely
effected.
GROSS PROFIT
Cost of revenue primarily consists of cost of materials, contract manufacturing
costs, manufacturing overhead expenses, royalty payments, and warranty expenses.
The Company's gross profit as a percentage of net revenue decreased to 11% in
fiscal 1997 from 43% in fiscal 1996 and 46% in fiscal 1995. The gross profit
decreases were primarily attributable to both minimal revenue produced by high
margin products, such as the PowerPort PC cards which were adversely impacted by
Apple Computer's repair program for the Macintosh PowerBook 5300 and 190 models,
and an increase in inventory and sales return reserves due to several slow
moving products. Gross margins are likely to fluctuate as a result of the sales
mix between lower and higher margin products, the nature and amount of licensing
and royalty income, and changes in distribution channels, as well as changes in
component and production costs and price reductions. In particular, the Company
expects that over the next several quarters, pricing pressures will continue,
and new products will be introduced by the Company's competitors, both of which
may have an adverse effect on the gross margins from the Company's products for
the Apple platform. The Company does not expect gross margin to return to its
higher historical levels.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") expenses decreased to $12.0
million in fiscal 1997 from $14.6 million in fiscal 1996. Fiscal 1996 research
and development expenses of $14.6 million increased from $8.8 million in fiscal
1995. The decline in fiscal 1997 is a result of the elimination of R&D expenses
associated with the divestiture of GlobalCenter. The increase in research and
development expenses in fiscal 1996 as compared to fiscal 1995 reflect
significant increases in personnel and related costs incurred in the development
of new products and the enhancement of existing products. Research and
development expenses as a percentage of net revenue were 14%, 11%, and 11% in
fiscal 1997, 1996,
22
<PAGE> 23
and 1995, respectively. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, in compliance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Software to be Sold, Leased, or Otherwise
Marketed." Historically, software development has been substantially completed
concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date.
MARKETING AND SALES
The Company's marketing and sales expenses increased to $28.9 million in fiscal
1997 from $23.0 million in fiscal 1996 and from $14.1 million in fiscal 1995.
Marketing and sales expenses were 32%, 17%, and 18% of net revenue in fiscal
1997, 1996, and 1995, respectively. Fiscal 1997 expenses increased due to
advertising and promotion costs associated with new products such as Focal
Point, NewsCatcher and speakerphone modems.
The increase in marketing and sales expense in fiscal 1996, as compared to
fiscal 1995, resulted from the inclusion, beginning in August 1994 of marketing
and sales expenses from the acquisition of SofNet, the introduction of new and
enhanced products, the expansion of distribution and dealer channels, increased
product advertising, the expansion of the Company's customer support
organization, and the addition of marketing and sales personnel. The Company
expects that advertising activities will probably decrease in fiscal 1998 in
absolute terms and as a percentage of total net revenue.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $7.4 million in fiscal 1997
from $5.7 million in fiscal 1996 and from $4.1 million in fiscal 1995. The
increase in general and administrative expense in fiscal 1997 was primarily due
to legal expenses associated with the settlement of two lawsuits, additional bad
debt reserves and other general operating expenses. General and administrative
expenses as a percentage of net revenue were 8%, 4%, and 5% in fiscal 1997,
1996, and 1995, respectively.
RESTRUCTURING COSTS
In December 1996, the Company announced a restructuring plan to streamline its
operations, reduce its workforce and enable the Company to improve its operating
results. The Company recorded a restructuring charge of $1.3 million related
primarily to severance costs, write-offs of fixed assets and purchased software
technology and a lease abandonment.
LOSS FROM INVESTMENT IN GLOBALCENTER
In April 1996, Global Village announced that it had incorporated its Internet
Services Division as a standalone business called GlobalCenter, Inc. At the same
time, the Company announced that UUNET Technologies, Inc. had acquired an equity
interest in GlobalCenter, Inc. At that time, the Company no longer had the
ability to exercise significant control over GlobalCenter. Accordingly, the
Company no longer consolidated the results of GlobalCenter and began to account
for its investment using the equity method of accounting. As a result of the
refinancing and operating performance of GlobalCenter during the first quarter
of fiscal 1997, the Company recorded an investment loss of $2.2 million and
reduced the book value of its investment to zero. In December 1996, GlobalCenter
entered into a definitive merger agreement whereby GlobalCenter and
Phoenix-based Primenet Services for the Internet, Inc. merged, reducing the
Company's percentage ownership below 10%. Accordingly, in the third quarter of
fiscal 1997, the Company began accounting for its investment in GlobalCenter
using the cost method of accounting. The Company's investment balance as of
March 31, 1997 remains zero.
23
<PAGE> 24
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's acquisition of SofNet in August 1994,
approximately $12.8 million of the purchase price was allocated to in-process
research and development. This in-process research and development had not
achieved technological feasibility at the time of the acquisition and,
therefore, did not qualify for capitalization under generally accepted
accounting principles for software capitalization, and thus was charged to
operations in the second quarter of fiscal 1995.
OTHER INCOME
The Company's net other income decreased to $0.8 million in fiscal 1997 from
$1.2 million in fiscal 1996 and from $0.8 million in fiscal 1995. Other income
was 1% of net revenue in each of fiscal 1997, 1996, and 1995. The dollar
decrease in fiscal 1997 is the result of a decrease in interest income
associated with lower cash balances and an increase in interest expense related
to the line of credit borrowings, partially offset by an increase in other
income. The increase in fiscal 1996 over fiscal 1995 is primarily attributable
to an increase in interest income.
PROVISION FOR INCOME TAXES
The combined federal, state and foreign effective income tax rates for
continuing operations were 13% in fiscal 1997, 30% in fiscal 1996, and 37% in
fiscal 1995 (excluding the impact of the one-time in-process research and
development charge).
The fiscal 1997 rate differs from the combined statutory rates primarily due to
the establishment of a full valuation allowance against the deferred tax assets.
The Company's increased foreign activities during fiscal 1996 was the primary
differential from the combined statutory rates for that period. In addition, the
rates also differ from the combined statutory rates in effect during these
periods as a result of tax exempt interest, available research credits, and
foreign sales corporation tax benefits.
DISCONTINUED OPERATIONS
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United Kingdom
(formerly, the Company's ISDN division). The disposition of the division has
been accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30 and prior period financial statements have
been restated to reflect the discontinuation of the enterprise network server
operation. The loss from discontinued operations of $1.8 million, $3.3 million,
and $1.5 million in fiscal years 1997, 1996 and 1995, respectively, represents
the operation's operating losses, with no associated tax benefits. The loss on
disposal of discontinued operations of $2.2 million in fiscal 1997 (no income
tax benefits) represents the cost of disposal of the operation (including
estimated contingent liabilities of $2.0 million at March 31, 1997) net of $3.8
million of cash received from the sale of the operation's assets. The $2.2
million loss on disposal of discontinued operations also includes a $2.1 million
loss from operations, from the measurement date to the disposal date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $9.7 million at March 31,
1997, representing 28% of total assets. Working capital was $36.4 million at
March 31, 1996, and a negative $3.8 million at March 31, 1997, a decline of
$40.2 million. The decrease in working capital was primarily attributable to
24
<PAGE> 25
losses from continuing and discontinued operations, investments in AirMedia,
Inc. and GlobalCenter, Inc., and repurchases of common stock.
Since its last fiscal year end, the Company has used approximately $24.1 million
in cash to finance both its continuing and discontinued operations. Any further
operating losses, inventory buildups or inability to collect its accounts
receivable could necessitate further reductions in expenses and would have a
material adverse affect on the Company's business, financial condition and
results of operations. At March 31, 1997, the Company's principal source of
liquidity was $9.7 million in cash which includes $4.2 million in borrowings
against its bank line of credit. The Company is in the process of evaluating
various measures to improve its operating performance and manage its cash
requirements for fiscal 1998.
At March 31, 1997, the Company had borrowings against its bank line of credit of
$4.2 million. At December 31, 1996, the Company was in violation of certain
financial covenants under its line of credit and had been notified by its lender
that it was in default of its borrowing agreement. In February 1997, the Company
renegotiated the terms of the line of credit and was in compliance with such
terms as of March 31, 1997. In April 1997, the Company entered into a new line
of credit agreement with another bank which provides for borrowings of up to
$5.0 million based on eligible accounts receivable. The Company's accounts
receivable (net of reserves) dropped over the fiscal year from $12.4 million on
March 31, 1996 to $4.3 million on March 31, 1997, consequently reducing the
Company's borrowing capacity through its new line of credit.
The Company does not expect fiscal 1998 capital expenditures to exceed
historical levels and may possibly be reduced. During the past year, the Company
has experienced significant negative cash flows. However, the Company currently
believes that its existing cash and new credit facility, along with a reduction
in overhead and direct costs, resizing its business, and the recovery of certain
tax assets, should enable the Company to meet its cash requirements for at least
the next twelve months. The preceding sentence is a forward-looking statement.
The Company's funding requirements may change at any time due to various
factors, including the Company's operating results, the results and timing of
the Company's launch of new products and services, the Company's ability to
reduce or control various operating expenses through cost containment measures
or operating reductions, the success of the Company's marketing efforts,
technological advances and competition. The Company may be required to issue
additional debt or equity securities which could substantially dilute the
ownership of existing stockholders. Any shortfall in funding could result in the
Company having to curtail the introduction or development of new products and
its entry into new markets, any of which could have a material adverse affect on
the Company's business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
(1) Consolidated Financial Statements
Independent Auditors' Report 26
Consolidated Balance Sheets as of March 31, 1997 and 1996 27
Consolidated Statements of Operations for the three years ended March 31, 1997 28
Consolidated Statements of Stockholders' Equity for the three years ended March 31, 29
1997
Consolidated Statements of Cash Flows for the three years ended March 31, 1997 30
Notes to Consolidated Financial Statements 31
(2) Consolidated Financial Statement Schedule for the three years ended March 31, 1997.
Schedule II -- Consolidated Valuation and Qualifying Accounts 43
</TABLE>
Schedules other than those listed above have been omitted since they are either
not applicable, not required or the information is included elsewhere herein.
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Global Village Communication, Inc.
We have audited the consolidated financial statements of Global Village
Communication, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global Village
Communication, Inc. and subsidiaries as of March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Palo Alto, California
April 23, 1997
26
<PAGE> 27
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 1997 1996
- --------------------------------------------------------------------------------------
In thousands, except share and per share data
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,687 $15,900
Short-term investments -- 21,819
Accounts receivable, net 4,324 12,449
Inventories, net 2,071 5,779
Income tax receivable 7,665 --
Deferred income taxes -- 2,384
Other current assets 343 1,998
Net assets of discontinued operations -- 277
- --------------------------------------------------------------------------------------
Total current assets 24,090 60,606
- --------------------------------------------------------------------------------------
Property and equipment, net 6,929 10,055
Investment in AirMedia, Inc. 4,043 --
Other assets 138 1,374
- --------------------------------------------------------------------------------------
Total assets $ 35,200 $72,035
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings $ 4,241 $ --
Accounts payable 15,971 18,046
Accrued and other liabilities 7,638 5,823
Income taxes payable -- 335
- --------------------------------------------------------------------------------------
Total current liabilities 27,850 24,204
- --------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, $0.001 par value; 30,000,000 shares authorized;
16,929,690 and 16,744,837 shares issued and outstanding 17 17
Additional paid-in capital 42,873 43,226
Cumulative translation adjustment -- 247
Retained earnings (accumulated deficit) (35,540) 4,341
- --------------------------------------------------------------------------------------
Total stockholders' equity 7,350 47,831
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 35,200 $72,035
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
27
<PAGE> 28
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1997 1996 1995
- ----------------------------------------------------------------------------------------
In thousands, except per share data
<S> <C> <C> <C>
Net revenue $ 90,174 $136,941 $80,021
Cost of revenue 80,439 77,583 43,407
- ----------------------------------------------------------------------------------------
Gross profit 9,735 59,358 36,614
- ----------------------------------------------------------------------------------------
Operating expenses:
Research and development 12,008 14,550 8,824
Marketing and sales 28,900 22,976 14,094
General and administrative 7,367 5,678 4,126
Restructuring costs 1,298 -- --
Loss from investment in GlobalCenter, Inc. 2,191 -- --
In-process research and development -- -- 12,809
- ----------------------------------------------------------------------------------------
Total operating expenses 51,764 43,204 39,853
- ----------------------------------------------------------------------------------------
Income (loss) from operations (42,029) 16,154 (3,239)
Other income (expense), net:
Interest income 411 1,000 832
Interest expense (248) -- (2)
Other income 613 154 13
- ----------------------------------------------------------------------------------------
Total other income, net 776 1,154 843
- ----------------------------------------------------------------------------------------
Income (loss) before income taxes (41,253) 17,308 (2,396)
Provision for income taxes (benefit) (5,401) 5,160 3,810
- ----------------------------------------------------------------------------------------
Income (loss) from continuing operations (35,852) 12,148 (6,206)
- ----------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations (1,822) (3,312) (1,466)
Loss on disposal of discontinued operations (2,207) -- --
- ----------------------------------------------------------------------------------------
Loss from discontinued operations (4,029) (3,312) (1,466)
- ----------------------------------------------------------------------------------------
Net income (loss) $(39,881) $ 8,836 $(7,672)
- ----------------------------------------------------------------------------------------
Income (loss) per share from continuing operations $ (2.13) $ 0.68 $ (0.41)
Loss per share from discontinued operations (0.24) (0.19) (0.10)
Net income (loss) per share $ (2.37) $ 0.49 $ (0.51)
- ----------------------------------------------------------------------------------------
Shares used in computing per share amounts 16,835 17,872 15,013
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
28
<PAGE> 29
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Cumulative Earnings Total
------------------- Paid-in Translation (Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit) Equity
-------------------------------------------------------------------------------------------------
In thousands, except share data
<S> <C> <C> <C> <C> <C> <C>
Balances as of March 31, 1994: 13,671,000 $13 $25,805 $ 109 $ 3,177 $ 29,104
Exercise of stock options 638,481 1 361 -- -- 362
SofNet, Inc. acquisition 1,772,369 2 13,078 -- -- 13,080
Shares issued under ESPP 55,848 -- 382 -- -- 382
Cashless exercise of redeemable
warrant 29,731 -- -- -- -- --
Tax benefits related to stock
plans -- -- 866 -- -- 866
Foreign currency translation
adjustment -- -- -- 13 -- 13
Net loss -- -- -- -- (7,672) (7,672)
- -------------------------------------------------------------------------------------------------
Balances as of March 31, 1995: 16,167,429 16 40,492 122 (4,495) 36,135
Exercise of stock options 583,711 1 1,547 -- -- 1,548
Shares issued under ESPP 63,229 -- 539 -- -- 539
Treasury shares acquired (69,532) -- (984) -- -- (984)
Tax benefits related to stock
plans -- -- 1,632 -- -- 1,632
Foreign currency translation
adjustment -- -- -- 125 -- 125
Net income -- -- -- -- 8,836 8,836
- -------------------------------------------------------------------------------------------------
Balances as of March 31, 1996: 16,744,837 17 43,226 247 4,341 47,831
Exercise of stock options 288,967 -- 575 -- -- 575
Shares issued under ESPP 74,386 -- 367 -- -- 367
Treasury shares acquired (178,500) -- (1,295) -- -- (1,295)
Foreign currency translation
adjustment -- -- -- (247) -- (247)
Net loss -- -- -- -- (39,881) (39,881)
- -------------------------------------------------------------------------------------------------
Balances as of March 31, 1997 16,929,690 $17 $42,873 $ -- $(35,540) $ 7,350
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
29
<PAGE> 30
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1997 1996 1995
- ------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(39,881) $ 8,836 $ (7,672)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,782 2,879 1,279
Loss on disposal of property and equipment 220 -- --
Deferred income taxes 3,234 -- (1,150)
Acquired in-process research and development -- -- 12,809
Write-off of GlobalCenter, Inc. investment 2,191 -- --
Tax benefits related to stock plans -- 1,632 866
Changes in operating assets and liabilities:
Accounts receivable, net 7,913 (1,059) (6,620)
Inventories 3,627 (1,881) (200)
Income taxes (7,665) -- --
Other current assets 1,474 (685) (1,064)
Accounts payable (1,462) 5,968 7,099
Accrued and other liabilities (174) 742 283
Income taxes payable (335) (1,505) 74
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities
of:
Continuing operations (27,076) 14,927 5,704
Discontinued operations 2,977 1,228 1,448
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (24,099) 16,155 7,152
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,802) (6,514) (5,724)
Proceeds from sale of property and equipment 71 -- --
Cash used in acquisition of SofNet, Inc., net of
cash acquired -- -- (583)
Other assets (386) 93 188
Purchases of short-term investments (23,217) (78,747) (55,253)
Proceeds from sales and maturities of short-term
investments 45,036 77,897 55,513
Investment in AirMedia, Inc. (4,043) -- --
Investment in GlobalCenter, Inc. (1,548) -- --
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 14,111 (7,271) (5,859)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under line of credit 8,000 -- --
Repayments under line of credit (3,759) -- --
Payments of capital lease obligations -- -- (33)
Proceeds from issuance of Common Stock, net 942 2,086 744
Repurchases of Common Stock (1,161) (984) --
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,022 1,102 711
- ------------------------------------------------------------------------------------------
Effect of foreign currency exchange rate changes on
cash and cash equivalents (247) 125 13
Net increase (decrease) in cash and cash equivalents (6,213) 10,111 2,017
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 15,900 5,789 3,772
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,687 $ 15,900 $ 5,789
- ------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid during the year for:
Interest $ 211 $ 100 $ 2
Income taxes $ -- $ 5,033 $ 4,074
Non-cash investing and financing activities:
Non-cash net assets contributed to GlobalCenter,
Inc. $ 643 $ -- $ --
Value of Common Stock issued for purchase of
SofNet, Inc. $ -- $ -- $ 13,080
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
30
<PAGE> 31
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Global Village Communication, Inc. (the Company), a Delaware corporation, was
founded in June 1989 and is a leader in the design, development and marketing of
easy-to-use integrated communications products and services for users of
personal computer users with Windows, Macintosh, OS/2 or DOS operating systems.
The Company's products enable mobile, home office, and networked computer users
in small and medium-sized organizations to communicate efficiently with
colleagues, customers, and suppliers.
Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying Consolidated Financial Statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents and Short-Term Investments. Cash and cash equivalents
consist of cash and highly liquid investments such as money market funds,
commercial paper, and U.S. Treasury Bills with maturities of three months or
less at the time of purchase.
Short-term investments generally consist of U.S. Treasury Bills, commercial
paper, and municipal bonds with original maturities in excess of 90 days. The
Company has classified its investments in certain debt and equity securities as
available-for-sale. Such investments are recorded at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity. As of
March 31, 1996, unrealized gains and losses were not significant. The cost of
securities sold is based upon the specific identification method.
Inventories. Inventories are stated at standard cost, which approximates the
lower of actual cost (first-in, first-out method) or market.
Property and Equipment. Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the respective assets,
generally three to five years. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the improvements or the lease term,
generally five years.
Fair Value of Financial Instruments. The carrying amounts of cash, cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short maturity of those instruments. The
amounts of the short-term debt approximates fair value because the interest
rates change with market interest rates.
Product Warranty. The Company warrants its products for up to five years from
date of shipment. A provision for the estimated future costs of warranty repair
or replacement is provided at the time of sale.
31
<PAGE> 32
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition. Revenue is generally recognized at the time of shipment.
Revenue from sales to distributors and dealers are subject to agreements
allowing limited rights of return and exchange, and price protection.
Accordingly, the Company provides reserves for estimated future returns,
exchanges, and price protection credits in the same period as related revenue.
Revenue from products licensed to original equipment manufacturers (OEM's) is
recognized when sales to end users are reported to the Company.
The Company's revenue recognition policies comply with the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 91-1, "Software Revenue Recognition."
Software Development Costs. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. Through March 31, 1997, software development has been substantially
completed concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date.
Income Taxes. The Company accounts for income taxes under the asset and
liability method of accounting. Under the asset and liability method, deferred
tax assets and liabilities are recognized based on the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns.
Net Income (Loss) Per Share. Net income (loss) per share data has been computed
using net income, the weighted average number of shares of Common Stock, and
common equivalent shares from stock options outstanding (when dilutive using the
treasury stock method).
Impact of Recently Issued Accounting Standards. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," ("SFAS No.
121") effective for the fiscal year ended March 31, 1997. SFAS No. 121 requires
that impairment losses be recorded on long-lived assets and certain identifiable
intangibles when indicators of impairment are present and the undiscounted cash
flows estimated by those assets are less than the assets' carrying amounts.
Adoption of this standard did not have a material impact on the Company's
consolidated financial statements.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") effective for the fiscal year ended March 31, 1997. SFAS No.
123 establishes a fair value method of accounting for stock-based employee
compensation plans. As allowed under provisions of SFAS No. 123, the Company has
chosen to continue the intrinsic value based method for stock-based employee
compensation plans and provide pro forma disclosures of results and results per
share as if the accounting provisions of SFAS No. 123 had been adopted. As the
Company has elected to adopt only disclosure requirements of SFAS No. 123, such
adoption had no effect on the Company's consolidated net loss or cash flows.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires dual presentation of basic earnings
per share ("EPS") and diluted EPS on the face of all statements of operations
issued after December 15, 1997, for all entities with complex capital
structures.
Basic EPS is computed using net earnings divided by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common
32
<PAGE> 33
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares issuable through stock-based compensation including stock options,
restricted stock awards, warrants, and other convertible securities using the
treasury stock method. The Company expects basic EPS for profitable periods will
be higher than primary EPS as presented in the accompanying consolidated
financial statements and diluted EPS for profitable periods will not differ
materially from primary EPS as presented in the accompanying consolidated
financial statements. Computations for loss periods should not change
significantly.
Foreign Currency Translation. All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date.
Revenues, costs, and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions and realized translation adjustments are included
in the consolidated statements of operations.
Reclassifications. Certain amounts in prior years' consolidated financial
statements have been reclassified to conform with the fiscal 1997 consolidated
financial statement presentation.
NOTE 2. DISCONTINUED OPERATIONS
In January 1996, the Company acquired KNX Limited, a leading UK-based provider
of ISDN remote access products. The transaction was effected through the
exchange of shares of Common Stock of the Company for all outstanding shares of
KNX Limited. In total, the Company issued, or reserved for issuance on exercise
of options, 1,365,951 shares of the Company's Common Stock. The acquisition of
KNX was accounted for using the pooling of interests method of accounting.
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United Kingdom
(formerly, the Company's ISDN division). The disposition of the division has
been accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30 and prior period consolidated financial
statements have been restated to reflect the discontinuation of the enterprise
network server operation. The loss from discontinued operations of $1.8 million,
$3.3 million, and $1.5 million in fiscal years 1997, 1996 and 1995,
respectively, represents the operation's operating losses, with no associated
tax benefits. The loss on disposal of discontinued operations of $2.2 million in
fiscal 1997 (no income tax benefit) represents the cost of disposal of the
operation (including estimated contingent liabilities of $2.0 million at March
31, 1997), net of $3.8 million of cash received from the sale of the operation's
assets. The $2.2 million loss on disposal of discontinued operations also
includes a $2.1 million loss from operations from the measurement date to the
disposal date.
33
<PAGE> 34
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
In thousands
Short-term investments:
U.S. government securities -- $ 1,647
Municipal securities -- 20,172
- ------------------------------------------------------------------------------------
Total short-term investments -- $21,819
- ------------------------------------------------------------------------------------
Accounts receivable:
Trade accounts receivable $10,712 $14,303
Less allowance for returns and doubtful accounts (6,388) (1,854)
- ------------------------------------------------------------------------------------
Net accounts receivable $ 4,324 $12,449
- ------------------------------------------------------------------------------------
Inventories:
Purchased parts $ 199 $ 131
Work in process 369 217
Finished goods 1,503 5,431
- ------------------------------------------------------------------------------------
Total inventories $ 2,071 $ 5,779
- ------------------------------------------------------------------------------------
Property and equipment:
Computer, test, and production equipment $ 9,847 $10,280
Furniture and fixtures 3,193 3,057
Leasehold improvements 2,428 2,108
- ------------------------------------------------------------------------------------
15,468 15,445
Less accumulated depreciation and amortization (8,539) (5,390)
- ------------------------------------------------------------------------------------
Total property and equipment, net $ 6,929 $10,055
- ------------------------------------------------------------------------------------
Accrued and other liabilities:
Warranty and other product related obligations $ 2,090 $ 1,503
Accrued compensation and benefits 740 3,058
Other 4,808 1,262
- ------------------------------------------------------------------------------------
Total accrued and other liabilities $ 7,638 $ 5,823
- ------------------------------------------------------------------------------------
</TABLE>
NOTE 4. INVESTMENT IN GLOBALCENTER, INC. AND AIRMEDIA, INC.
In April 1996, the Company announced that it had incorporated its Internet
Services Division as a standalone business called GlobalCenter, Inc. At the same
time, the Company announced that UUNET Technologies, Inc. had acquired an equity
interest in GlobalCenter, Inc. At that time, the Company no longer had the
ability to exercise significant control over GlobalCenter. Accordingly, the
Company no longer consolidated the results of GlobalCenter and began to account
for its investment using the equity method of accounting. As a result of the
refinancing and operating performance of GlobalCenter during the first quarter
of fiscal 1997, the Company recorded an investment loss of $2.2 million, and
reduced the book value of its investment to zero. In December 1996, GlobalCenter
entered into a definitive merger agreement whereby GlobalCenter and
Phoenix-based Primenet Services for the Internet, Inc. merged, reducing the
Company's percentage ownership below 10%. Accordingly, in the third quarter of
fiscal
34
<PAGE> 35
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997, the Company began accounting for its investment in GlobalCenter using the
cost method of accounting. The Company's investment balance as of March 31, 1997
remains zero.
In the second quarter of fiscal 1997, the Company completed an equity investment
in AirMedia, Inc. (formerly ExMachina, Inc.) of $4,043,000. The Company
manufactures, markets and distributes receivers for AirMedia's AirMedia Live!
Network. The Company accounts for its investment in AirMedia using the cost
method of accounting. The Company believes its investment is recoverable.
However, it is possible that circumstances could change in the near term and
that such change could have a material adverse effect on the Company's financial
position and results of operations.
NOTE 5. LINE OF CREDIT
As of March 31, 1997, the Company's borrowings under its line of credit were
subject to the terms of a forbearance agreement it negotiated with its bank in
February 1997 which expires in August 1997. Borrowings under the forbearance
agreement bear interest at the bank's prime rate plus 5% (13.5% at March 31,
1997) and are collateralized by all of the Company's assets. Total borrowings
are limited to the lesser of $4,200,000 or 50% of eligible accounts receivable
through April 15, 1997; 40% through May 15, 1997; 30% through June 15, 1997; 20%
through July 15, 1997; and 10% through August 15, 1997. The agreement places
restrictions on the Company's ability to pay dividends or effect mergers or
acquisitions. The Company is subject to compensating balance arrangements in
connection with this credit facility that require that an average balance of
$250,000 be deposited with the bank.
In April 1997, the Company entered into a new line of credit agreement with
another bank, expiring in April 1999, which replaced the Company's prior line of
credit. Borrowings under the agreement bear interest at the bank's prime rate
plus 2.5%. The total borrowings are limited to the lessor of $5,000,000 or 80%
of eligible receivables, as defined, and are collateralized by all of the
Company's assets. This new facility contains various financial covenants and
restrictions, including restrictions on the Company's ability to pay dividends
or to effect mergers or acquisitions.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases facilities under noncancelable operating
leases expiring in January 2000, April 2000, and December 2002. The lease
expiring in April 2000 has a renewal option for an additional five-year term.
Space associated with this lease has been subleased for various periods through
April 2000. Future minimum lease payments as of March 31, 1997 are:
<TABLE>
<CAPTION>
LEASE SUBLEASE NET LEASE
FISCAL YEAR PAYMENTS INCOME PAYMENTS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands
1998 $1,656 $ (978) $ 678
1999 1,681 (379) 1,302
2000 1,679 (183) 1,496
2001 172 -- 172
2002 90 -- 90
- -------------------------------------------------------------------------------------------------
Total $5,278 $(1,540) $3,738
- -------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense was approximately $1,188,000, $1,352,000 and $791,000 for the
fiscal years ended March 31, 1997, 1996, and 1995, respectively.
Legal Matters. The Company is a party to certain lawsuits and claims arising out
of the normal conduct of its business. These claims generally relate to
commercial transactions, patent infringements, and employment matters. While the
ultimate resolution of such suits or other proceedings against the Company
cannot be predicted with certainty, management expects that these matters will
not have a material adverse effect on the financial position or results of
operations of the Company.
NOTE 7. STOCKHOLDERS' EQUITY
Common and Preferred Stock. As of March 31, 1997, the number of Common and
Preferred Stock shares authorized was 30,000,000 and 5,000,000, respectively.
The classes, series, rights, and preferences of the Preferred Stock may be
established by the Company's Board of Directors.
On August 30, 1994, the Company issued approximately 1,800,000 shares of Common
Stock as part of the consideration for the acquisition of SofNet, Inc. (see Note
9).
On January 5, 1996, the Company issued approximately 1,400,000 shares of Common
Stock as part of the consideration for the acquisition of KNX Limited (see Note
2).
Stock Option Plan. The Company has adopted a stock option plan (the "Plan")
under which incentive stock options may be granted to employees and officers,
and non-qualified (supplemental) stock options may be granted to employees,
officers, directors, and consultants to purchase an aggregate of 5,100,000
shares of Common Stock. Options may be granted at an exercise price of at least
100% of the fair market value of Common Stock at the date of grant, or for
supplemental options, at an exercise price not less than 85% of the fair market
value of such stock at the date of grant. All options expire no later than 10
years after the date of grant and generally vest over 4 or 5 years with 20% to
25% vesting after one year and the balance vesting monthly over the remaining 3
to 4 years. As of March 31, 1997, options to purchase 372,568 shares of Common
Stock were exercisable under the Plan. In May 1996 and January 1997, the
Company's Board of Directors authorized the repricing of approximately 410,000
and 1,352,000 outstanding options, respectively, to purchase the Company's
common stock to an exercise price of $10.19 and $3.063 per share, respectively.
The repricings have been reflected in the plan activity below.
Director's Plan. In January 1994, the Company adopted the 1994 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for automatic grants of options to purchase shares of Common Stock to
non-employee directors of the Company at or above the fair market value of the
Common Stock on the date of grant. The Company has reserved a total of 200,000
shares of the Company's Common Stock for issuance upon the exercise of options
granted pursuant to the Directors' Plan. Options granted under the Directors'
Plan expire 10 years following the grant and vest in five annual installments
commencing on the date of grant and are contingent upon the continuous service
of the director. As of March 31, 1997, options representing 7,666 shares were
exercisable under the Directors' Plan.
36
<PAGE> 37
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the combined stock option activity under the Plan and Directors'
Plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1997 1996 1995
---------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year 2,315,955 $ 9.25 2,350,444 $ 4.66 2,348,695 $1.71
Granted 1,779,330 5.78 1,011,485 15.64 832,278 9.26
Exercised (288,967) 1.99 (583,711) 2.70 (638,481) 0.57
Canceled (1,320,883) 10.00 (462,263) 8.24 (192,048) 2.27
Repriced -- granted 1,762,384 4.68 -- -- -- --
Repriced -- canceled (1,762,384) 10.96 -- -- -- --
- -------------------------------------------------------------------------------------------------
Outstanding -- end of year 2,485,435 $ 2.76 2,315,955 $ 9.25 2,350,444 $4.66
- -------------------------------------------------------------------------------------------------
Weighted average fair value of
options, calculated under SFAS
No. 123 (see below) $ 2.47 $ 9.64
- -------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information as of March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------- Options Exercisable
Weighted Average ----------------------------
Range of Remaining Weighted Average Weighted Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.04 -- $ 3.00 659,255 6.61 $1.19 81,807 $0.77
3.06 1,674,080 8.33 3.06 289,602 3.06
3.38 -- 14.88 152,100 8.98 6.17 8,825 8.88
-------------------------------------------------------------------------------------------------
0.04 -- 14.88 2,485,435 7.91 $2.76 380,234 $2.70
-------------------------------------------------------------------------------------------------
</TABLE>
Employee Stock Purchase Plan. In December 1993, the Company adopted the 1993
Employee Stock Purchase Plan (the "Purchase Plan") reserving 300,000 shares of
Common Stock for issuance under the Purchase Plan. The Purchase Plan provides a
means by which employees may purchase the Company's Common Stock through payroll
deductions, of up to 10% of their compensation, at a price per share equal to
the lower of (i) 85% of the fair market value of a share of Common Stock on the
date of commencement of participation in the offering; or (ii) 85% of the fair
market value of a share of Common Stock on the date of purchase. As of March 31,
1997, 193,463 shares had been purchased under the Purchase Plan.
Common Stock Reserved for Future Issuance.
<TABLE>
<CAPTION>
Shares
- -------------------------------------------------------------------------------------
<S> <C>
Exercise of stock options 2,986,558
Employee stock purchase plan 106,537
Directors' plan 192,000
- -------------------------------------------------------------------------------------
Total reserved shares 3,285,095
- -------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Stock-Based Compensation Under SFAS No. 123. At March 31, 1997,
the Company had three stock-based compensation plans, which are described above.
As the Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock plans, no
compensation cost has been recognized for such plans.
Had compensation cost for the Company's stock plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net loss and net loss per share would have changed to the pro
forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) -- as reported $ (39,881) $8,836
Net income (loss) -- pro forma $ (42,976) $6,820
Net income (loss) per share -- as reported $ (2.37) $ 0.49
Net income (loss) per share -- pro forma $ (2.55) $ 0.38
</TABLE>
The fair value of each option grant and Purchase Plan shares issuable is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for grants in 1997 and 1996,
respectively: no dividend yield is expected for all years; expected volatility
of 96% and 90%; risk-free interest rates of 6.25% and 5.93%; and expected lives
of 4 years and 3 years.
NOTE 8. RESTRUCTURING COSTS
In December 1996, the Company announced a restructuring plan ("Plan") to
streamline its operations, reduce its workforce and enable the Company to
improve its operating results. The Company recorded a restructuring charge of
$1.3 million related primarily to severance costs ($270,000), write-offs of
fixed assets and purchased software ($490,000), a lease abandonment ($340,000)
and other one-time charges associated with the Plan ($200,000).
The Company began implementing this Plan during the third quarter and terminated
approximately 40 employees. As of March 31, 1997, the restructuring accrual
balance was approximately $540,000 and relates primarily to remaining lease
payments and miscellaneous costs associated with its Atlanta facility. All
termination benefits have been paid as of March 31, 1997.
38
<PAGE> 39
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. ACQUISITION OF SOFNET, INC.
On August 30, 1994, the Company purchased all of the outstanding stock of
SofNet, Inc. (SofNet), a Georgia corporation. SofNet is a developer and marketer
of communications software for Windows, OS/2, and DOS computers for use in
stand-alone and networked environments. The purchase price of $13.7 million for
the acquisition consisted of approximately $0.7 million in cash and 1.8 million
shares of the Company's Common Stock. Additionally, in connection with the
acquisition, pursuant to a management incentive agreement, certain members of
SofNet management and key employees received $1.2 million in cash, for prior
services rendered. The acquisition of SofNet was accounted for using the
purchase method of accounting and accordingly, the operating results of SofNet
have been included in the accompanying consolidated financial statements of the
Company from the date of acquisition. The purchase price of approximately $13.7
million was allocated as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------
In thousands
Net tangible liabilities assumed $ (820)
Purchased in-process research and development 12,809
Purchased software technology 674
Deferred income taxes 1,000
- ------------------------------------------------------------------------------------
Total purchase price $13,663
- ------------------------------------------------------------------------------------
</TABLE>
The purchased in-process research and development was charged to operations in
the second quarter of fiscal 1995. The amounts allocated to purchased software
technology were amortized over four years with the remaining balance written off
in the third quarter of fiscal 1997.
The following unaudited pro forma combined results of operations for the years
ended March 31, 1995 are presented as if the acquisition had occurred at the
beginning of the year. The onetime charge for the write-off of in-process
research and development has not been reflected in the following pro forma
summary as it is nonrecurring. This pro forma summary does not necessarily
reflect the results of operations as they would have been if the Company had
constituted a consolidated entity during such period.
<TABLE>
<CAPTION>
1995
- ------------------------------------------------------------------------------------
<S> <C>
In thousands
Net revenue from continuing operations $82,275
Net income 4,435
Net income per share $ 0.25
- ------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES
The Company's pretax income (loss) from continuing and discontinued operations
consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands
Continuing operations (primarily domestic) $(41,253) $17,308 $(2,396)
Discontinued operations (primarily foreign) (4,029) (3,312) (1,466)
- ----------------------------------------------------------------------------------------
Total pretax income (loss) $(45,282) $13,996 $(3,862)
- ----------------------------------------------------------------------------------------
</TABLE>
The components of income tax expense (benefit) from continuing operations are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands
Current:
Federal $ (8,637) $ 2,749 $ 3,040
State 2 677 1,054
- ----------------------------------------------------------------------------------------
Total current (8,635) 3,426 4,094
- ----------------------------------------------------------------------------------------
Deferred:
Federal 2,845 46 (820)
State 389 56 (330)
- ----------------------------------------------------------------------------------------
Total deferred 3,234 102 (1,150)
- ----------------------------------------------------------------------------------------
Charge in lieu of income tax associated with
exercise of stock options -- 1,632 866
- ----------------------------------------------------------------------------------------
$ (5,401) $ 5,160 $ 3,810
- ----------------------------------------------------------------------------------------
</TABLE>
No income tax expense or benefit has been recorded in any of the results of
discontinued operations.
40
<PAGE> 41
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
In thousands
Deferred tax assets:
Accounts receivable, due to allowance for returns and
doubtful accounts $ 3,316 $ 419
Inventories, due to additional costs inventoried for tax
purposes and reserves 2,531 471
Warranty accrual deducted for financial purposes not
taken for tax purposes 851 637
Accruals for financial purposes not taken for tax
purposes 418 936
Net operating loss carryforward, federal and state 16,347 4,390
Tax credits, federal and state 1,572 --
Other 610 29
- --------------------------------------------------------------------------------------
25,645 6,882
Less valuation allowance (25,645) (3,648)
- --------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ 3,234
- --------------------------------------------------------------------------------------
</TABLE>
As of March 31, 1997, the Company had established a full valuation allowance
against its deferred tax assets based on the belief that there was sufficient
uncertainty regarding the realizability of the deferred tax assets.
The difference between the effective income tax rate and the U.S. federal
statutory income tax rate for continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate (34)% 35 % (34)%
State tax, net of federal benefit -- 5 % 16 %
Foreign loss without tax benefit 3 % 7 % 12 %
Foreign sales corporation benefit -- (2)% --
Tax exempt interest -- (2)% (7)%
Insolvent investment in foreign subsidiary (25)% -- --
Increase in valuation allowance 48 % -- --
In process research and development not deductible for
tax purposes -- -- 113 %
Research and experimental tax credit (2)% (4)% (2)%
Other (2)% (2)% 1 %
- --------------------------------------------------------------------------------------
(12)% 37 % 99 %
- --------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired SofNet, Inc., in August 1994. As of the acquisition date,
SofNet had federal and Georgia net operating loss carryforwards of $9.3 million.
The federal net operating loss is subject to an annual limitation approximating
$820,000 as a result of an "ownership change" as defined in Section 382 of the
Internal Revenue Code. Any unused annual limitation can be carried forward to
subsequent years. In addition, the SofNet operating losses can only be used to
offset future earnings of SofNet as a result of separate return limitation
rules.
Additionally, as of March 31, 1997, the Company had net operating loss
carryforwards of approximately $33.8 million for federal income tax purposes,
which expire in 2012, and $28.3 million for state income tax purposes, which
expire in 2002.
At March 31, 1997, the Company had unused research and development credits of
approximately $841,000 for federal income tax purposes, which expire through
2012, and $200,000 for California income tax purposes, which expire in 2002.
There are also minimum tax credits of approximately $530,000 available to reduce
future federal income taxes, which will carryforward indefinitely.
NOTE 11. CUSTOMERS AND CREDIT CONCENTRATIONS
The Company sells primarily to distributors, dealers, and OEMs in North America,
Europe, and the Pacific Rim. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such actual losses have been within
management's expectations.
In the United States, the Company markets its products primarily through
distributors and resellers. For the fiscal year ended March 31, 1997, sales to
two customers accounted for 21% and 11%, respectively, of net revenue and
represented accounts receivable of $1,694,000 and $1,435,000, respectively, as
of March 31, 1997. For the fiscal year ended March 31, 1996, sales to one
customer accounted for 33% of net revenue and represented $4,903,000 of accounts
receivable as of March 31, 1996. For the fiscal year ended March 31, 1995, sales
to two customers represented 31% and 12%, respectively, of net revenue and
represented $2,895,000 and $679,000 of accounts receivable, respectively, as of
March 31, 1995.
The Company's international sales for the fiscal years ended March 31, 1997,
1996, and 1995 represented approximately 15%, 19%, and 11% of net revenue,
respectively.
42
<PAGE> 43
SCHEDULE II
GLOBAL VILLAGE COMMUNICATION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In thousands
Year ended March 31, 1997
Allowance for returns and doubtful accounts $ 1,854 $ 20,090 $ (15,556) $ 6,388
Warranty and other product-related obligations 1,503 2,774 (2,187) 2,090
- -------------------------------------------------------------------------------------------------
Total allowance $ 3,357 $ 22,864 $ (17,743) $ 8,478
- -------------------------------------------------------------------------------------------------
Year ended March 31, 1996
Allowance for returns and doubtful accounts $ 1,807 $ 8,268 $ (8,221) $ 1,854
Warranty and other product-related obligations 1,559 4,479 (4,535) 1,503
- -------------------------------------------------------------------------------------------------
Total allowance $ 3,366 $ 12,747 $ (12,756) $ 3,357
- -------------------------------------------------------------------------------------------------
Year ended March 31, 1995
Allowance for returns and doubtful accounts $ 475 $ 4,516 $ (3,184) $ 1,807
Warranty and other product-related obligations 1,058 2,730 (2,229) 1,559
- -------------------------------------------------------------------------------------------------
Total allowance $ 1,533 $ 7,246 $ (5,413) $ 3,366
- -------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
43
<PAGE> 44
[PART 3 GRAPHIC]
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The Company's definitive Proxy Statement will be filed with the Securities and
Exchange Commission in Connection with the solicitation of proxies for the
Company's Annual Meeting of Stockholders to be held on July 31, 1997 (the "Proxy
Statement"). Certain information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
caption "Election of Directors." For information regarding executive officers of
the Company, see Part I of this Form 10-K under the caption "Executive Officers
of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the Company's
definitive Proxy Statement under the caption "Executive Compensation" and is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item will be contained in the Company's
definitive Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the Company's
definitive Proxy Statement under the caption "Certain Transactions" and is
incorporated by reference herein.
[PART 4 GRAPHIC]
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedule
The Financial Statements and Schedule filed as part of this Annual Report on
Form 10-K are listed in the index under Item 8.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended March
31, 1997.
44
<PAGE> 45
(c) Exhibits
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
<C> <S> <C>
3.1 Form of Certificate of Incorporation of Global Village
Communication Delaware *
3.2 Form of Bylaws of Global Village Communication Delaware *
4.1 Reference is made to Exhibits 3.1 through 3.2 *
4.2 Amended and Restated Investor Rights Agreements among the
Company and certain other person named therein, dated as of
May 26, 1992 *
4.3 Employee Shareholder Agreement between the Company and
certain stockholders of the Company, as amended, and
related schedule *
4.4 Common Stock Purchase Agreement between the Company and
other parties named therein, dated as of October 2, 1989 *
4.5 Series A Junior Preferred Stock Exchange Agreement between
the Company and other parties named therein, dated as of
May 14, 1991 *
4.6 Series B Preferred Stock Purchase Agreement between the
Company and other parties named therein, dated as of May
14, 1991 *
4.7 Warrant to Purchase 31,395 Shares of Series B Preferred
granted by the Company to Company to Dominion Ventures,
dated as of November 27, 1991 *
4.8 Series C Preferred Stock Purchase Agreement between the
Company and other parties named therein, dated as of May
26, 1992 *
10.1 Form of Indemnity Agreement entered into between the
Company and its directors and officers, with related
schedule *
10.2 1991 Stock Option Plan, as amended (the "Option Plan") *
10.3 Form of Incentive Stock Option under the Option Plan *
10.4 Form of Supplemental Stock Option under the Option Plan *
10.5 1993 Employee Stock Purchase Plan *
10.6 Sublease Agreement between the Company and Northern Telecom
Inc., dated as of May 21, 1992 *
10.7 Source Code License, Agreement between the Company and
Apple Computer, Inc. dated August 31, 1992 *
10.8 Software Development Agreement between the Company and
Apple Computer, Inc. dated August 31, 1992 *
10.9 Form of License and Distribution Agreement between the
Company and Apple Computer, Inc. dated December 15, 1993 *
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
<C> <S> <C>
10.10 Distribution Agreement between the Company and Ingram
Micro, dated as of February 16, 1993 *
10.11 Distribution Agreement between the Company and Merisel,
Inc. dated as of June 1, 1993 *
10.12 1994 Non-Employee Directors' Stock Option Plan, including
Form of Supplemental Stock Option *
10.13+ Master OEM Purchase Agreement between Apple Computer, Inc.
and the Company dated June 6, 1994 *
10.14+ License and Distribution Agreement between the Company and
Apple Computer, Inc. dated June 6, 1994 *
10.15++ First Amendment to License Agreement between Apple
Computer, Inc. and the Company, dated June 30, 1994 *
10.16++ Lease Agreement between Herman Christensen Jr. and Raymond
P. Christensen and the Company dated July 14, 1994. *
10.17 Loan and Security Agreement between Silicon Valley Bank and
the Company, dated April 23, 1997
10.18 Schedule to Loan and Security Agreement between Silicon
Valley Bank and the Company, dated April 23, 1997
10.19++ Management Incentive Plan
11.1 Statement Regarding Computation of Per Share Results
13.0 Annual Report to Stockholders x
16.1 Letter regarding change in accountants x
23.1 Consent of KPMG Peat Marwick LLP
25.1 Power of Attorney
</TABLE>
* Filed as a exhibit to the Registrant's Registration Statement of Form S-1
(Registration No 33-73878 as amended) and incorporate by reference hereby.
+ The Company has received confidential treatment with respect to portions of
these Exhibits.
++ The Company has requested confidential treatment with respect to portions of
this document.
xFiled as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994 and incorporated by reference hereby.
,Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1994 and incorporated by reference hereby.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 13th day of
June, 1997.
GLOBAL VILLAGE COMMUNICATION, INC.
BY: /s/ NEIL SELVIN
-----------------------------------
Neil Selvin, President, Chief
Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Neil Selvin and John M. Peterson jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ LEONARD A. LEHMANN Chairman of the Board June 13, 1997
- -----------------------------------------------
Leonard A. Lehmann
/s/ NEIL SELVIN President, Chief Executive June 13, 1997
- ----------------------------------------------- Officer and Director
Neil Selvin (Principle Executive
Officer)
/s/ JOHN M. PETERSON Vice President, Finance, June 13, 1997
- ----------------------------------------------- Chief Financial Officer
John M. Peterson and Secretary (Principle
Financial and Accounting
Officer)
/s/ KEVIN R. COMPTON Director June 13, 1997
- -----------------------------------------------
Kevin R. Compton
/s/ EUGENE EIDENBERG Director June 13, 1997
- -----------------------------------------------
Eugene Eidenberg
/s/ KENNETH A. GOLDMAN Director June 13, 1997
- -----------------------------------------------
Kenneth A. Goldman
/s/ JEREMY JAECH Director June 13, 1997
- -----------------------------------------------
Jeremy Jaech
</TABLE>
47
<PAGE> 1
EXHIBIT 11.1
GLOBAL VILLAGE COMMUNICATION, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
In thousands, except per share data
Statement of operations data:
Income (loss) from continuing operations $ (35,852) $ 12,148 $ (6,206)
Loss from discontinued operations (4,029) (3,312) (1,466)
- ----------------------------------------------------------------------------------------
Net income (loss) $ (39,881) $ 8,836 $ (7,672)
- ----------------------------------------------------------------------------------------
Weighted average shares outstanding 16,835 16,478 15,013
Common equivalent shares from stock options -- 1,394 --
- ----------------------------------------------------------------------------------------
Average common and equivalent shares
outstanding(1) 16,835 17,872 15,013
- ----------------------------------------------------------------------------------------
Income (loss) per share from continuing
operations $ (2.13) $ 0.68 $ (0.41)
Loss per share from discontinued operations (0.24) (0.19) (0.10)
- ----------------------------------------------------------------------------------------
Net income (loss) per share $ (2.37) $ 0.49 $ (0.51)
- ----------------------------------------------------------------------------------------
</TABLE>
(1)The difference between primary and fully diluted earnings per share is not
material.
48
<PAGE> 1
EXHIBIT 10.17
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: GLOBAL VILLAGE COMMUNICATION, INC.
ADDRESS: 1144 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
DATE: APRIL 23, 1997
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named
above (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of
this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section 8
below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing.
1.2 INTEREST. All Loans and all other monetary Obligations * shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the
same rate as the other Loans. Silicon may, in its discretion, charge interest
to Borrower's Deposit Accounts maintained with Silicon. Regardless of the
amount of Obligations that may be outstanding from time to time, Borrower shall
pay Silicon minimum monthly interest during the term of this Agreement in the
amount set forth on the Schedule (the "Minimum Monthly Interest").
* (OTHER THAN INTEREST NOT YET DUE AND PAYABLE)
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other * Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to
pay Silicon interest on the outstanding amount of any Overadvance, on demand,
at a rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
* MONETARY
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.
1.5 LETTERS OF CREDIT. [Not Applicable]
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All
Inventory, Equipment, Receivables, and General Intangibles, including, without
limitation, all of Borrower's Deposit Accounts, and all money, and all property
now or at any time in the future in Silicon's possession (including claims and
credit balances), and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties), all products
and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Silicon may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")*.
*(EXCEPT THAT A SECURITY INTEREST IS NOT GRANTED IN ANY LICENSE RIGHTS OF THE
BORROWER WHERE THE BORROWER IS PROHIBITED FROM GRANTING A SECURITY INTEREST IN
SUCH RIGHTS UNDER THE AGREEMENT BETWEEN THE BORROWER AND THE LICENSOR)
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all
-1-
<PAGE> 2
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
jurisdictions in which any failure to do so would have a material adverse
effect on Borrower. The execution, delivery and performance by Borrower of
this Agreement, and all other documents contemplated hereby (i) have been duly
and validly authorized, (ii) are enforceable against Borrower in accordance
with their terms (except as enforcement may be limited by equitable principles
and by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to creditors' rights generally), and (iii) do not violate Borrower's
articles or certificate of incorporation, or Borrower's by-laws, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (iv) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has
an interest (whether as owner, mortgagee, beneficiary under a deed of trust,
lien or otherwise), Borrower shall, whenever requested by Silicon, use its best
efforts to cause such third party to execute and deliver to Silicon, in form
acceptable to Silicon, such waivers and subordinations as Silicon shall
specify, so as to ensure that Silicon's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any lease
of real property where any of the Collateral now or in the future may be
located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Silicon in writing of any material
loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records *, comprising an
accounting system in accordance with generally accepted accounting principles.
* IN ALL MATERIAL RESPECTS
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated *. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or
business of Borrower. Borrower is now and will continue to be solvent.
* IN ALL MATERIAL RESPECTS
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely
pay, all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep
the contested taxes from becoming a lien upon any of the Collateral. Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior
tax years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has not and
will not withdraw from participation in, permit partial or complete termination
of, or permit the occurrence of any other event with respect to, any such plan
which could result in any liability of Borrower, including any liability to the
Pension Benefit Guaranty Corporation or its successors or any other
governmental agency. Borrower shall, at all times, utilize the services of an
outside payroll service providing for the automatic deposit of all payroll
taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
-2-
<PAGE> 3
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or
before any governmental agency (or any basis therefor known to Borrower) which
may result, either separately or in the aggregate, in any material adverse
change in the financial condition or business of Borrower, or in any material
impairment in the ability of Borrower to carry on its business in substantially
the same manner as it is now being conducted. Borrower will promptly inform
Silicon in writing of any claim, proceeding, litigation or investigation in the
future threatened or instituted by or against Borrower involving any single
claim of $50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to
purchase or carry any "margin stock" or to extend credit to others for the
purpose of purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans
are requested by Borrower shall, on the date each Loan is requested and made,
(i) represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and indorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms;
provided, however, that Borrower's failure to execute and deliver the same
shall not affect or limit Silicon's security interest and other rights in all
of Borrower's Receivables, nor shall Silicon's failure to advance or lend
against a specific Receivable affect or limit Silicon's security interest and
other rights therein. Loan requests received after 2:30 PM will not be
considered by Silicon until the next Business Day. Together with each such
schedule and assignment, or later if requested by Silicon, Borrower shall
furnish Silicon with copies (or, at Silicon's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence
of delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Silicon an aged accounts receivable trial
balance in such form and at such intervals as Silicon shall request. In
addition, Borrower shall deliver to Silicon the originals of all instruments,
chattel paper, security agreements, guarantees and other documents and property
evidencing or securing any Receivables, immediately upon receipt thereof and in
the same form as received, with all necessary indorsements, all of which shall
be with recourse. Borrower shall also provide Silicon with copies of all
credit memos within two days after the date issued.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Silicon may specify,
pursuant to a blocked account agreement in such form as Silicon may specify.
Silicon or its designee may, at any time, notify Account Debtors that the
Receivables have been assigned to Silicon.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in
such order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower
agrees that it will not commingle proceeds of Collateral with any of Borrower's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Silicon. Nothing in
this Section limits the restrictions on disposition of Collateral set forth
elsewhere in this Agreement.
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time
-3-
<PAGE> 4
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
after the occurrence of an Event of Default, settle or adjust disputes or
claims directly with Account Debtors for amounts and upon terms which Silicon
considers advisable in its reasonable credit judgment and, in all cases,
Silicon shall credit Borrower's Loan account with only the net amounts received
by Silicon in payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location
and condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance
to Silicon, so that Silicon is satisfied that such insurance is, at all times,
in full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any
such insurance, Silicon shall apply such proceeds in reduction of the
Obligations as Silicon shall determine in its sole discretion, except that,
provided no Default or Event of Default has occurred and is continuing, Silicon
shall release to Borrower insurance proceeds with respect to Equipment totaling
less than $100,000, which shall be utilized by Borrower for the replacement of
the Equipment with respect to which the insurance proceeds were paid. Silicon
may require reasonable assurance that the insurance proceeds so released will
be so used. If Borrower fails to provide or pay for any insurance, Silicon
may, but is not obligated to, obtain the same at Borrower's expense. Borrower
shall promptly deliver to Silicon copies of all reports made to insurance
companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records *.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Silicon shall have the right to
disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any
accounting firm, service bureau or third party to store Borrower's books or
records at any location other than Borrower's Address, without first obtaining
Silicon's written consent, which may be conditioned upon such accounting firm,
service bureau or other third party agreeing to give Silicon the same rights
with respect to access to books and records and related rights as Silicon has
under this Loan Agreement. Borrower waives the benefit of any
accountant-client privilege or other evidentiary privilege precluding or
limiting the disclosure, divulgence or delivery of any of its books and records
** (except that Borrower does not waive any attorney-client privilege).
* RELATING TO THE COLLATERAL
** TO SILICON OR OTHERWISE IN CONNECTION WITH LITIGATION INVOLVING FRAUDULENT
CONDUCT RELATING TO THE BORROWER
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity *; (ii) acquire any
assets, except in the ordinary course of business **; (iii) enter into any
other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except for the sale of finished Inventory in the
ordinary course of Borrower's business, and except for the sale of obsolete or
unneeded Equipment in the ordinary course of business+; (v) store any Inventory
or other Collateral with any warehouseman or other third party; (vi) sell any
Inventory on a sale-or-return, guaranteed sale, consignment, or other
contingent basis; (vii) make any loans of any money or other assets ***; (viii)
incur any debts, outside the ordinary course of business, which would have a
material, adverse effect on Borrower or on
-4-
<PAGE> 5
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
the prospect of repayment of the Obligations; (ix) guarantee or otherwise
become liable with respect to the obligations of another party or entity; (x)
pay or declare any dividends on Borrower's stock (except for dividends payable
solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise
acquire, directly or indirectly, any of Borrower's stock; (xii) make any change
in Borrower's capital structure which would have a material adverse effect on
Borrower or on the prospect of repayment of the Obligations; or (xiii) pay
total compensation, including salaries, fees, bonuses, commissions, and all
other payments, whether directly or indirectly, in money or otherwise, to
Borrower's executives, officers and directors (or any relative thereof) in an
amount in excess of the amount set forth on the Schedule; or (xiv) dissolve or
elect to dissolve. Transactions permitted by the foregoing provisions of this
Section are only permitted if no Default or Event of Default would occur as a
result of such transaction.
* , EXCEPT THAT THE BORROWER MAY MERGE OR CONSOLIDATE WITH ANOTHER CORPORATION
IF THE BORROWER IS THE SURVIVING CORPORATION IN THE MERGER AND THE AGGREGATE
VALUE OF THE ASSETS ACQUIRED IN THE MERGER DO NOT EXCEED THE LESSER OF $300,000
OR 10% OF BORROWER'S TANGIBLE NET WORTH (AS DEFINED IN THE SCHEDULE) AS OF THE
END OF THE MONTH PRIOR TO THE EFFECTIVE DATE OF THE MERGER, AND THE ASSETS OF
THE CORPORATION ACQUIRED IN THE MERGER ARE NOT SUBJECT TO ANY LIENS OR
ENCUMBRANCES, EXCEPT PERMITTED LIENS, AND PROVIDED THAT OTHERWISE THE CONSENT
OF SILICON SHALL NOT UNREASONABLY WITHHELD
** FOR AN AGGREGATE PURCHASE PRICE NOT TO EXCEED THE LESSER OF $300,000 OR 10%
OF BORROWER'S TANGIBLE NET WORTH (AS DEFINED IN THE SCHEDULE) AS OF THE END OF
THE MONTH PRIOR TO THE EFFECTIVE DATE OF THE ACQUISITION AND THE ASSETS SO
ACQUIRED ARE NOT SUBJECT TO ANY LIENS OR ENCUMBRANCES, EXCEPT PERMITTED LIENS,
AND PROVIDED THAT OTHERWISE THE CONSENT OF SILICON SHALL NOT UNREASONABLY
WITHHELD;
*** EXCEPT FOR LOANS TO EMPLOYEES OF BORROWER IN AN AGGREGATE AMOUNT NOT TO
EXCEED $100,000 AT ANY ONE TIME OUTSTANDING
+AND EXCEPT FOR LICENSES ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any
manner relating to Borrower, Borrower shall, without expense to Silicon, make
available Borrower and its officers, employees and agents and Borrower's books
and records, to the extent that Silicon may deem them reasonably necessary in
order to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that
the Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence * of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to ** the greater of (i) an amount equal to all interest due and payable
during the six months immediately preceding the effective date of termination,
or (ii) an amount equal to the Minimum Monthly Interest multiplied by the
number of full or partial months from the effective date of termination to the
Maturity Date, or (iii) an amount equal to the average monthly interest accrued
during the six months immediately preceding the effective date of termination,
multiplied by the number of full or partial months from the effective date of
termination to the Maturity Date. The termination fee shall be due and payable
on the effective date of termination and thereafter shall bear interest at a
rate equal to the highest rate applicable to any of the Obligations.
*AND DURING THE CONTINUANCE
**$100,000 IF TERMINATION OCCURS ON OR BEFORE THE FIRST ANNIVERSARY OF THE
DATE HEREOF, OR $50,000 IF TERMINATION OCCURS AFTER THE FIRST ANNIVERSARY OF
THE DATE HEREOF; PROVIDED THAT NO TERMINATION FEE SHALL BE PAYABLE IF THE
OBLIGATIONS ARE REPAID WITH THE PROCEEDS OF A NEW LOAN FACILITY PROVIDED BY
SILICON OR ONE OF ITS OTHER DIVISIONS
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an
amount equal to the face amount of all such Letters of Credit plus all
interest, fees and cost due or to become due in connection therewith, to secure
all of the Obligations relating to said Letters of Credit, pursuant to
Silicon's then standard form cash pledge agreement. Notwithstanding any
termination of this Agreement, all of Silicon's security interests in all of
the Collateral and all of the terms and provisions of this Agreement shall
continue in full force and effect until all Obligations have been paid and
performed in full; provided that, without limiting the fact that Loans are
subject to the discretion of Silicon, Silicon may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in
any way affect or impair any right or remedy of Silicon, nor shall any such
termination relieve Borrower of any Obligation to Silicon, until all of the
Obligations
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<PAGE> 6
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
have been paid and performed in full. Upon payment and performance in full of
all the Obligations and termination of this Agreement, Silicon shall promptly
deliver to Borrower termination statements, requests for reconveyances and such
other documents as may be required to fully terminate Silicon's security
interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or
any of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit *; or (d) Borrower shall fail to comply with any of the
financial covenants set forth in the Schedule or shall fail to perform any
other non-monetary Obligation which by its nature cannot be cured; or (e)
Borrower shall fail to perform any other non-monetary Obligation, which failure
is not cured within 5 Business Days after the date due; or (f) Any levy,
assessment, attachment, seizure, lien or encumbrance (other than a Permitted
Lien) is made on all or any part of the Collateral which is not cured within 10
days after the occurrence of the same; or (g) any default or event of default
occurs under any obligation secured by a Permitted Lien, which is not cured
within any applicable cure period or waived in writing by the holder of the
Permitted Lien; or (h) Borrower breaches any material contract or obligation,
which has or may reasonably be expected to have a material adverse effect on
Borrower's business or financial condition; or (i) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect; or (j) the commencement of
any proceeding against Borrower or any guarantor of any of the Obligations
under any reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction, now or in
the future in effect, which is not cured by the dismissal thereof within 30
days after the date commenced; or (k) revocation or termination of, or
limitation or denial of liability upon, any guaranty of the Obligations or any
attempt to do any of the foregoing, or commencement of proceedings by any
guarantor of any of the Obligations under any bankruptcy or insolvency law; or
(l) revocation or termination of, or limitation or denial of liability upon,
any pledge of any certificate of deposit, securities or other property or asset
of any kind pledged by any third party to secure any or all of the Obligations,
or any attempt to do any of the foregoing, or commencement of proceedings by or
against any such third party under any bankruptcy or insolvency law; or (m)
Borrower makes any payment on account of any indebtedness or obligation which
has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or (n) **there shall be a change in the record or beneficial
ownership of an aggregate of more than 20% of the outstanding shares of stock
of Borrower, in one or more transactions, compared to the ownership of
outstanding shares of stock of Borrower in effect on the date hereof, without
the prior written consent of Silicon; or (o) Borrower shall generally not pay
its debts as they become due, or Borrower shall conceal, remove or transfer any
part of its property, with intent to hinder, delay or defraud its creditors, or
make or suffer any transfer of any of its property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall
be a material adverse change in Borrower's business or financial condition; or
(q) Silicon, acting in good faith and in a commercially reasonable manner,
deems itself insecure because of the occurrence of an event prior to the
effective date hereof of which Silicon had no knowledge on the effective date
or because of the occurrence of an event on or subsequent to the effective
date. Silicon may cease making any Loans hereunder during any of the above
cure periods, and thereafter if an Event of Default has occurred.
* AND SUCH CONDITION SHALL CONTINUE TO EXIST FOR 3 DAYS, PROVIDED THAT IF THE
AMOUNT OF TOTAL LOANS AND OTHER OBLIGATIONS OUTSTANDING AT ANY TIME EXCEED THE
MAXIMUM DOLLAR AMOUNT COMPONENT OF THE CREDIT LIMIT (AS OPPOSED TO EXCEEDING
THE PERCENTAGE OF ELIGIBLE ACCOUNTS COMPONENT OF THE CREDIT LIMIT), THEN SUCH 3
DAY PERIOD SHALL NOT BE APPLICABLE
** A PERSON OR GROUP OF PERSONS ACTING TOGETHER SHALL ACQUIRE 30% OR MORE OF
THE OUTSTANDING EQUITY SECURITIES OF THE BORROWER
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b)
Accelerate and declare all or any part of the Obligations to be immediately
due, payable, and performable, notwithstanding any deferred or installment
payments allowed by any instrument evidencing or relating to any Obligation;
(c) Take possession of any or all of the Collateral wherever it may be found,
and for that purpose Borrower hereby authorizes Silicon without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store, or remove any of the Collateral, and
remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as Silicon deems it
reasonably necessary in order to complete the enforcement of its rights under
this Agreement or any other agreement; provided, however, that should Silicon
seek to take possession of any of the Collateral by Court process, Borrower
hereby irrevocably waives: (i) any bond and any surety or security relating
thereto required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and (iii) any requirement that
Silicon retain possession of, and not dispose of, any such Collateral until
after trial or final judgment; (d) Require Borrower to assemble any or all of
the
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<PAGE> 7
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
Collateral and make it available to Silicon at places designated by Silicon
which are reasonably convenient to Silicon and Borrower, and to remove the
Collateral to such locations as Silicon may deem advisable; (e) Complete the
processing, manufacturing or repair of any Collateral prior to a disposition
thereof and, for such purpose and for the purpose of removal, Silicon shall
have the right to use Borrower's premises, vehicles, hoists, lifts, cranes,
equipment and all other property without charge; (f) Sell, lease or otherwise
dispose of any of the Collateral, in its condition at the time Silicon obtains
possession of it or after further manufacturing, processing or repair, at one
or more public and/or private sales, in lots or in bulk, for cash, exchange or
other property, or on credit, and to adjourn any such sale from time to time
without notice other than oral announcement at the time scheduled for sale.
Silicon shall have the right to conduct such disposition on Borrower's premises
without charge, for such time or times as Silicon deems reasonable, or on
Silicon's premises, or elsewhere and the Collateral need not be located at the
place of disposition. Silicon may directly or through any affiliated company
purchase or lease any Collateral at any such public disposition, and if
permissible under applicable law, at any private disposition. Any sale or
other disposition of Collateral shall not relieve Borrower of any liability
Borrower may have if any Collateral is defective as to title or physical
condition or otherwise at the time of sale; (g) Demand payment of, and collect
any Receivables and General Intangibles comprising Collateral and, in
connection therewith, Borrower irrevocably authorizes Silicon to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof, and, in Silicon's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables and the like for less than face value;
(h) Offset against any sums in any of Borrower's general, special or other
Deposit Accounts with Silicon; and (i) Demand and receive possession of any of
Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. All reasonable
attorneys' fees, expenses, costs, liabilities and obligations incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations. Without
limiting any of Silicon's rights and remedies, from and after the occurrence of
any Event of Default, the interest rate applicable to the Obligations shall be
increased by an additional four percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Silicon, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price
in cash or by cashier's check or wire transfer is required; (vi) With respect
to any sale of any of the Collateral, Silicon may (but is not obligated to)
direct any prospective purchaser to ascertain directly from Borrower any and
all information concerning the same. Silicon shall be free to employ other
methods of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents)
at any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all
other present and future agreements; (b) Execute on behalf of Borrower any
document exercising, transferring or assigning any option to purchase, sell or
otherwise dispose of or to lease (as lessor or lessee) any real or personal
property which is part of Silicon's Collateral or in which Silicon has an
interest; (c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien; (d) Take control in any manner of any
cash or non-cash items of payment or proceeds of Collateral; endorse the name
of Borrower upon any instruments, or documents, evidence of payment or
Collateral that may come into Silicon's possession; (e) Endorse all checks and
other forms of remittances received by Silicon; (f) Pay, contest or settle any
lien, charge, encumbrance, security interest and adverse claim in or to any of
the Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; (g) Grant extensions of time to pay,
compromise claims and settle Receivables and General Intangibles for less than
face value and execute all releases and other documents in connection
therewith; (h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both; (i) Settle and adjust, and
give releases of, any insurance claim that relates to any of the Collateral and
obtain payment therefor; (j) Instruct any third party having custody or control
of any books or records belonging to, or relating to, Borrower to give Silicon
the same rights of access and other rights with respect thereto as Silicon has
under this Agreement; and (k) Take any action or pay any sum required of
Borrower pursuant to this Agreement and any other present or future agreements.
Any and all reasonable sums paid and any and all reasonable costs, expenses,
liabilities, obligations and attorneys' fees incurred by Silicon with respect
to the foregoing shall be added to and become part of the Obligations, shall be
payable on demand, and shall bear interest at a rate equal to the highest
interest
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<PAGE> 8
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
rate applicable to any of the Obligations. In no event shall Silicon's rights
under the foregoing power of attorney or any of Silicon's other rights under
this Agreement be deemed to indicate that Silicon is in control of the
business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due
upon any of the Obligations, and third to the principal of the Obligations, in
such order as Silicon shall determine in its sole discretion. Any surplus
shall be paid to Borrower or other persons legally entitled thereto; Borrower
shall remain liable to Silicon for any deficiency. If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the
cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in the State
of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both, would
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Inventory" [NOT APPLICABLE].
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
Eligibility Requirements") are the minimum requirements for a Receivable to be
an Eligible Receivable: (i) the Receivable must not be outstanding for more
than 90 days from its invoice date, (ii) the Receivable must not represent
progress billings, or be due under a fulfillment or requirements contract with
the Account Debtor, (iii) the Receivable must not be subject to any
contingencies (including Receivables arising from sales on consignment,
guaranteed sale or other terms pursuant to which payment by the Account Debtor
may be conditional), (iv) the Receivable must not be owing from an Account
Debtor with whom the Borrower has any dispute (whether or not relating to the
particular Receivable), (v) the Receivable must not be owing from an Affiliate
of Borrower, (vi) the Receivable must not be owing from an Account Debtor which
is subject to any insolvency or bankruptcy proceeding, or whose financial
condition is not acceptable to Silicon, or which, fails or goes out of a
material portion of its business, (vii) the Receivable must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Silicon's satisfaction, with the United States
Assignment of Claims Act), (viii) the Receivable must not be owing from an
Account Debtor located outside the United States or Canada (unless pre-approved
by Silicon in its discretion in writing, or backed by a letter of credit
satisfactory to Silicon, or FCIA insured satisfactory to Silicon), (ix) the
Receivable must not be owing from an Account Debtor to whom Borrower is or may
be liable for goods purchased from such Account Debtor or otherwise.
Receivables owing from one Account Debtor will not be deemed Eligible
Receivables to the extent they exceed 25% of the total eligible Receivables
outstanding*. In addition, if more than 25% of the Receivables owing from an
Account Debtor are outstanding more than 90 days from their invoice date
(without regard to unapplied credits) or are otherwise not eligible
Receivables, then all Receivables owing from that Account Debtor will be deemed
ineligible for borrowing. Silicon may, from time to time, in its discretion,
revise the Minimum Eligibility Requirements, upon written notice to the
Borrower.
*EXCEPT THAT, IN THE CASE OF INGRAM MICRO, SUCH PERCENTAGE SHALL BE 35%
"Equipment" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures,
trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other
tangible personal property (other than Inventory) of every kind and description
used in Borrower's operations or owned by Borrower and any interest in any of
the foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
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<PAGE> 9
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Silicon, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
life insurance, key man insurance, credit insurance, liability insurance,
property insurance and other insurance), tax refunds and claims, computer
programs, discs, tapes and tape files, claims under guaranties, security
interests or other security held by or granted to Borrower, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such
goods, merchandise or other personal property, and all warehouse receipts,
documents of title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become
due, including, without limitation, all interest, charges, expenses, fees,
attorney's fees, expert witness fees, audit fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, termination fees,
minimum interest charges and any other sums chargeable to Borrower under this
Agreement or under any other present or future instrument or agreement between
Borrower and Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course
of business and securing obligations which are not delinquent; (vii) liens
incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by liens of the type described above in clauses (i) or
(ii) above, provided that any extension, renewal or replacement lien is limited
to the property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods *. Silicon will
have the right to require, as a condition to its consent under subparagraph
(iv) above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest
so long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
* ; (IX) ANY JUDGMENT, ATTACHMENT OR SIMILAR LIEN, IF THE JUDGMENT IT SECURES
IS FULLY COVERED BY INSURANCE AND HAS BEEN DISCHARGED OR EXECUTION THEREOF
EFFECTIVELY STAYED AND BONDED AGAINST PENDING APPEAL WITHIN 30 DAYS OF THE
ENTRY THEREOF; AND (X) EASEMENTS, RIGHTS OF WAY, SERVITUDES OR ZONING OR
BUILDING RESTRICTIONS AND OTHER MINOR ENCUMBRANCES ON REAL PROPERTY AND
IRREGULARITIES IN THE TITLE TO SUCH PROPERTY WHICH DO NOT IN THE AGGREGATE
MATERIALLY IMPAIR THE USE OR VALUE OF SUCH PROPERTY OR RISK THE LOSS OR
FORFEITURE OF TITLE THERETO
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms
of obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon
(including proceeds of Receivables and payment of the Obligations in full)
shall be deemed applied by Silicon on account of the Obligations three Business
Days after receipt by Silicon of immediately available funds, and, for purposes
of the foregoing, any such funds received after 2:30 PM on any day shall be
deemed received on the next Business Day.
-9-
<PAGE> 10
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
Silicon shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Silicon in its sole
discretion, and Silicon may charge Borrower's loan account for the amount of
any item of payment which is returned to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to
the Obligations, in such order and manner as Silicon shall determine in its
sole discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same
rate applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred or
suffered by Borrower or any other party through the ordinary negligence of
Silicon, or any of its directors, officers, employees, agents, attorneys or any
other Person affiliated with or representing Silicon, but nothing herein shall
relieve Silicon from liability for its own gross negligence or willful
misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
but Borrower acknowledges and agrees that Levy, Small & Lallas
-10-
<PAGE> 11
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
is representing only Silicon and not Borrower in connection with this Agreement.
If either Silicon or Borrower files any lawsuit against the other predicated on
a breach of this Agreement, the prevailing party in such action shall be
entitled to recover its reasonable costs and attorneys' fees, including (but not
limited to) reasonable attorneys' fees and costs incurred in the enforcement of,
execution upon or defense of any order, decree, award or judgment. All
attorneys' fees and costs to which Silicon may be entitled pursuant to this
Paragraph shall immediately become part of Borrower's Obligations, shall be due
on demand, and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void. No consent by Silicon to any assignment shall release Borrower
from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon,
its directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or
cause of action. The one-year period provided herein shall not be waived,
tolled, or extended except by the written consent of Silicon in its sole
discretion. This provision shall survive any termination of this Loan
Agreement or any other present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between
the parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any
rule of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part
of the consideration to Silicon to enter into this Agreement, Borrower (i)
agrees that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
GLOBAL VILLAGE COMMUNICATION, INC.
BY_______________________________
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY_______________________________
TITLE______________________________
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<PAGE> 1
EXHIBIT 10.18
SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: GLOBAL VILLAGE COMMUNICATION, INC.
ADDRESS: 1144 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
DATE: APRIL 23, 1997
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
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====================================================================================================================================
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: (i) $5,000,000 at any one time outstanding; or (ii) 80%
of the amount of Borrower's Eligible Receivables (as defined in Section 8 above); provided
that, for purposes of the foregoing, the greater of the following amounts shall be deducted
from total Receivables in determining the amount of Eligible Receivables: (a) 125% of the
Receivables that are not Eligible Receivables as defined in Section 8 above, or (b) the
receivable reserve established by the Borrower on its most recent balance sheet.
====================================================================================================================================
2. INTEREST.
INTEREST RATE (Section 1.2):
A rate equal to the "Prime Rate" in effect from time to time, plus 2.5% per annum. Interest
shall be calculated on the basis of a 360-day year for the actual number of days elapsed.
"Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is
a base rate upon which other rates charged by Silicon are based, and it is not necessarily the
best rate available at Silicon. The interest rate applicable to the Obligations shall change
on each date there is a change in the Prime Rate.
MINIMUM MONTHLY
INTEREST (Section 1.2): None
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<PAGE> 2
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3. FEES (Section 1.4):
Loan Fee: $50,000, payable concurrently herewith. (Any Commitment Fee previously paid by the Borrower
in connection with this loan shall be credited against this Fee.)
Collateral Monitoring
Fee: $1,000 per month, payable in arrears (prorated for any partial calendar month at the beginning
and at termination of this Agreement).
4. MATURITY DATE
(Section 6.1): Two years from the date of this Agreement, subject to automatic renewal as provided in Section
6.1 above, and early termination as provided in Section 6.2 above.
5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with all of the following covenants:
MINIMUM TANGIBLE
NET WORTH: Borrower shall maintain a Tangible Net Worth of not less than $3,000,000 (the "Minimum
Tangible Net Worth Requirement") as of the end of each fiscal quarter; provided that, at the
end of each fiscal year of the Borrower, the Minimum Tangible Net Worth Requirement shall
be increased by 60% of the net income of the Borrower during such fiscal year. Said increased
Minimum Tangible Net Worth Requirement shall be effective during the following fiscal year. In
no event shall the Minimum Tangible Net Worth Requirement be decreased.
DEFINITIONS. For purposes of the foregoing financial covenants, the following terms shall have the
following meanings:
"Tangible Net Worth" shall mean the excess of total assets over total liabilities, determined
in accordance with generally accepted accounting principles, with the following adjustments:
(A) there shall be excluded from assets: (i) notes, accounts receivable and
other obligations owing to the Borrower from its officers or other Affiliates, and (ii)
all assets which would be classified as intangible assets under generally accepted
accounting principles, including without limitation goodwill, licenses, patents,
trademarks, trade names, copyrights, capitalized software and organizational costs,
licenses and franchises
(B) there shall be excluded from liabilities: all indebtedness which is
subordinated to the Obligations under a subordination agreement in form specified by
Silicon or by language in the instrument evidencing the indebtedness which is acceptable
to Silicon in its discretion.
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<PAGE> 3
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(C) any write-downs or write-ups of Borrower's investment in Ex Machina, Inc.
will not be taken into account in determining Tangible Net Worth.
6. REPORTING.
(Section 5.3):
Borrower shall provide Silicon with the following:
1. Monthly Receivable agings, aged by invoice date, within fifteen days after the end of each
month.
2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers
within fifteen days after the end of each month.
3. Monthly reconciliations of Receivable agings (aged by invoice date), transaction reports, and
general ledger, within fifteen days after the end of each month.
4. Monthly reports, within fifteen days after the end of each month, as to (i) the Borrower's
Receivables reserves and offsets to such reserves and (ii) sell-through reports from
Borrower's account debtors with respect to Receivables which represent more than 10% of total
Eligible Receivables.
5. Monthly unaudited financial statements, as soon as available, and in any event within thirty
days after the end of each month.
6. Monthly Compliance Certificates, within thirty days after the end of each month, in such form
as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower,
certifying that as of the end of such month Borrower was in full compliance with all of the
terms and conditions of this Agreement, and setting forth calculations showing compliance with
the financial covenants set forth in this Agreement and such other information as Silicon
shall reasonably request.
7. Quarterly unaudited financial statements, as soon as available, and in any event within
forty-five days after the end of each fiscal quarter of Borrower.
8. Annual operating budgets (including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the
end of each fiscal year of Borrower.
9. Annual financial statements, as soon as available, and in any event within 120 days following
the end of Borrower's fiscal year, certified by independent certified public accountants
acceptable to Silicon.
7. COMPENSATION
(Section 5.5): Without Silicon's prior written consent, Borrower shall not pay total compensation, including
salaries, withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year to all of
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<PAGE> 4
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Borrower's executives, officers and directors (or any relative thereof) as a group in excess
of 115% of the total amount thereof in the prior fiscal year.
8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): None
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): None
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): See Representations and Warranties of Borrower dated March 26, 1997.
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): See Representations and Warranties of Borrower dated March 26, 1997. Borrower represents and
warrants that, although Borrower has offices outside California, all of Borrower's inventory
(with only immaterial exceptions) is located in the State of California.
MATERIAL ADVERSE
LITIGATION (Section 3.10): None
9. OTHER PROVISIONS
(Section 5.1): (1) BANKING RELATIONSHIP. Borrower shall at all times maintain its primary banking
relationship with Silicon.
(2) AFFILIATES. Borrower represents and warrants that Softnet, Inc. and Global
Village Communication, FSC are and will continue to be sales affiliates of
Borrower without any material assets.
(3) NOTE. Borrower shall, concurrently, deliver to Silicon the original $2,600,000
Promissory Note made by GlobalCenter, Inc. to the order of Borrower, duly
endorsed by Borrower to Silicon, to enable Silicon to perfect its security
interest therein.
</TABLE>
Borrower: Silicon:
GLOBAL VILLAGE COMMUNICATION, INC. SILICON VALLEY BANK
By_______________________________
By_______________________________ Title____________________________
President or Vice President
By_______________________________
Secretary or Ass't Secretary
<PAGE> 1
EXHIBIT 10.19
GLOBAL VILLAGE COMMUNICATION, INC.
MANAGEMENT INCENTIVE PLAN
1. ESTABLISHMENT AND PURPOSE
Global Village Communication, Inc. (the "Company") hereby establishes
the Global Village Communication, Inc. Management Incentive Plan (the "Plan")
to create additional incentives for eligible employees of the Company by
awarding eligible employees an incentive payment based on the performance of
the Company and each such employee during a fiscal year of the Company ("Fiscal
Year"). The first fiscal year of the Company during which this plan shall
operate shall be the fiscal year beginning April 1, 1997 and ending March 31,
1998 ("FY1998").
2. PARTICIPATION
a. The Compensation Committee of the Board of Directors of the
Company (respectively, the "Compensation Committee" and the "Board") shall
determine which officers of the Company shall participate in the Plan for the
applicable Fiscal Year performance period, and the executive staff of the
Company shall determine which employees of the Company who are not officers
shall participate in the Plan for the applicable Fiscal Year performance period
(collectively such selected individuals shall be called "Participants").
Notwithstanding any other provision of this Plan to the contrary, the Chief
Executive Officer of the Company shall not be eligible to participate in this
Plan.
b. To be eligible to participate in the Plan for a specific
Fiscal Year, a Participant must be an employee of the Company throughout the
entire period beginning (i) on the first workday of the applicable Fiscal Year
or the Participant's date of hire, whichever is later, but in any event no
later than January 1 of such Fiscal Year and (ii) ending on the last workday of
the applicable Fiscal Year. The applicability of this subparagraph may be
modified by the Compensation Committee in its discretion with respect to one or
more Participants.
c. If a Participant dies prior to the last workday of the
applicable Fiscal Year, then the Participant shall be deemed to have been an
employee until the end of such Fiscal Year and the beneficiary or estate, as
the case may be, of such Participant shall be eligible to receive payments for
the applicable Fiscal Year to which the Participant otherwise would have been
entitled if he or she had not died based on the Participant's Base Salary
actually paid during that Fiscal Year.
d. It is intended that an otherwise eligible Participant who is
on an approved medical or disability leave for an entire Fiscal Year will
receive no payment under the Plan for such Fiscal Year. Participants on an
approved medical or disability leave during any portion of a Fiscal Year who
are employed on first and last workday of the Fiscal Year shall be eligible to
receive payments based on Base Salary actually paid to such Participant during
such Fiscal Year as defined in paragraph 3(b)(i)
<PAGE> 2
below.
3. CALCULATION OF INCENTIVE BONUSES
a. Any payments under the Plan shall be in addition to and not in
lieu of Base Salary and other approved Company compensation.
b. The following terms shall have the following meanings:
i. "Base Salary" shall mean the salary for the Fiscal
Year identified as the Participant's "Base Salary" by the Company's Manager of
Human Resources which is actually paid to the Participant with respect to such
Fiscal Year. "Base Salary" shall not include bonuses, commissions, overtime,
shift differentials, income from option exercises, car allowances, relocation
fees, long term disability payments and such other similar amounts as may be
determined by the Company from time to time.
ii. "Plan Revenues" shall mean the projected revenues for
the Company for the applicable Fiscal Year proposed by the Company's executives
and approved by the Board.
iii. "Plan Profits" shall mean the projected income before
taxes (operating income plus interest and other income) for the Company for the
applicable Fiscal Year proposed by the Company's executives and approved by the
Board.
iv. "Actual Revenues Percentage" shall mean the actual
revenues of the Company for the applicable Fiscal Year as audited by the
Company's independent accountants using generally accepted accounting
principles, expressed as a percentage of Plan Revenue for that year.
v. "Actual Profits Percentage" shall mean the actual
income before taxes (operating income plus interest and other income) of the
Company for the applicable Fiscal Year as audited by the Company's independent
accountants using generally accepted accounting principles, expressed as a
percentage of Plan Profits for that year.
vi. "Company Performance Variable" shall mean the
arithmetic average of the Actual Revenues Percentage and the Actual Profits
Percentage for the applicable Fiscal Year, expressed as a percentage; provided,
however, that to the extent that either or both of the Actual Revenues
Percentage figure or the Actual Profits Percentage figure is greater than
____________, then the amount by which such number exceeds __________ shall be
doubled in calculating the Company Performance Variable. For example, if the
Actual Revenues Percentage equals ____________ and the Actual Profits
Percentage Equals ___________, then the Company Performance Variable would
equal ____________ (i.e., the percentage points for the Actual Profits
Percentage above would count twice, so that the arithmetic average would equal
___________________);
vii. "Individual Performance Goals" shall mean a set (not
less than three and not
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respect to the omitted portions.
<PAGE> 3
more than five) of specific performance goals for the applicable Fiscal Year to
be established, with respect to _____________, by and between the CEO and each
___________ and, with respect to other Participants, by and between the
__________ to whom such Participant reports and the Participant.
viii. "Individual Achievement Percentage" shall mean a
percentage figure to be determined by the superiors of each Participant setting
forth the extent to which the Individual Performance Goals were reached for the
applicable Fiscal Year. In general, the Individual Achievement Percentage will
be expressed in a range between ___________ and _____________, where
___________ performance shall be considered to meet minimal requirements,
_____________ performance shall be considered to fully meet requirements,
______________ performance shall be considered excellent, and ______________
performance shall be considered superlative.
ix. "Target Incentive Percentage" shall mean, for Company
salary Grades _________, _____________, for Grade _______, __________, and for
_________ of the Company, _______________.
c. No payments shall be made under the Plan unless both (i) the
Company's actual revenues for the applicable Fiscal Year shall equal not less
than ____________of Plan Revenues and (ii) the Company's actual profits for the
applicable Fiscal Year shall equal not less than _________ of Plan Profits.
d. Each Participant shall receive an incentive bonus in an amount
equal to the Company Performance Variable times the applicable Participant's
Individual Achievement Percentage times the Target Incentive Percentage times
such Participant's Base Salary received during the Fiscal Year. For example,
if during an applicable Fiscal Year a Participant has a Base Salary of
_________, the Company Performance Variable is _________, and the Participant's
Individual Achievement Percentage is ________, with a Target Incentive
Percentage of ______, then such Participant would receive a bonus under the
Plan equal to _________ (i.e., ___________ times the Base Salary of _________).
4. PAYMENT
a. Payments for each of the first three fiscal quarters of the
Company under the Plan (each, a "Quarterly Payment") will be paid to each
Participant as soon as administratively reasonable after the Company reports
its quarterly earnings applicable to such fiscal quarter. With respect to any
Participant, such Participant's Quarterly Payment shall be paid if (i) the
Company's actual revenues for the applicable fiscal quarter shall equal not
less than ___________ of the Plan Revenues for such quarter, and (ii) the
Company's actual profits for the applicable fiscal quarter shall equal not less
than __________ of the Plan Profits for such quarter. Each Participant's
Quarterly Payment shall be equal to such Participant's Target Incentive
Percentage, times such Participant's Base Salary paid during that quarter (i.e.
no multipliers for performance above plan targets or for
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with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
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<PAGE> 4
accomplishment of personal objectives shall be used in determining any
Participant's Quarterly Payment).
b. Payments for each Fiscal Year under the Plan will be paid to
each Participant as soon as administratively reasonable after the Company's
independent accountants have completed their audit of the Company's financial
statements for the applicable Fiscal Year; provided, that the provisions of
Section 2 shall apply to such payment. With respect to any Participant, such
Participant's incentive bonus shall be equal to the amount calculated pursuant
to Section 3(d) of the Management Plan, minus the aggregate amount paid to such
Participant pursuant to Section 4(a).
c. Payments made under the Plan are subject to all required
federal, state and local withholding. Payments under the Plan will not be
subject to 401(k) or Employee Stock Purchase Plan contributions or deductions.
If a Participant eligible to receive a payment under the Plan dies
before receiving such payment, the Company shall make such payment to the
Participant's designated beneficiary, or to the Participant's estate if no
beneficiary is designated, on the date payments are made to other Participants.
5. ADMINISTRATION
The Plan shall be administered by the Company. Any determination made
by the Company in interpreting the Plan shall be final and binding upon all
persons having an interest in the Plan.
6. NO ALIENATION, ASSIGNMENT OR ENCUMBERMENT OF PAYMENTS
A Participant's interest in the Plan may not be alienated, assigned or
encumbered, other than as provided in Paragraphs 2 and 4 above with respect to
payments to a beneficiary or an estate following the death of an eligible
Participant.
7. TERMINATION OR AMENDMENT OF THE PLAN
The Company may terminate or amend the Plan for any purpose; provided,
however, that no such termination or amendment shall be effective for any
Fiscal Year which has ended prior to the time that the action to terminate or
amend the Plan is taken.
8. NO EMPLOYMENT CONTRACT
The adoption and maintenance of the Plan shall not be deemed to be a
contract of employment between the Company and any of its employees. Nothing
in the Plan shall give any employee of the Company the right to be retained in
the Company's employ or to interfere with the Company's right to discharge any
employee at any time.
9. PLACE OF ADMINISTRATION; APPLICABLE LAWS
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<PAGE> 5
The place of administration of the Plan shall conclusively be deemed
to be within the State of California, and the Plan and the provisions hereof
shall be governed by and construed in accordance with the substantive laws of
the State of California.
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Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Global Village communication, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-89844, 33-76772, 33-76886, and 333-19899) on Forms S-3 and S-8 of Global
Village Communication, Inc. of our report dated April 23, 1997, relating to the
consolidated balance sheets of Global Village Communication, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997, and the related schedule,
which report appears in the March 31, 1997, annual report on Form 10-K of
Global Village Communication, Inc.
KPMG PEAT MARWICK LLP
Palo Alto, California
June 16, 1997
