SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
Commission file number 0-20008
VTEL CORPORATION
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 437-2700
Securities registered pursuant to section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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 filings pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. ( ).
The aggregate market value of 20,665,891 shares of the registrant's Common Stock
held by nonaffiliates on October 13, 1999 was approximately $68,466,096. For
purposes of this computation all officers, directors and 5% beneficial owners of
the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors and beneficial owners are, in
fact, affiliates of the registrant.
At October 13, 1999 there were 24,456,573 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the 1999 Annual Meeting are incorporated by reference into Part
III.
A list of all Exhibits to this Annual Report on Form 10-K is located at pages 50
through 54.
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PART I.
ITEM 1. BUSINESS
GENERAL
VTEL Corporation (VTEL, we or our) designs, manufactures, markets and
supports visual communication systems. VTEL's product line is based on the
latest microprocessor technology, a unique integration of hardware and software
that provides features which are far beyond traditional video and audio
conferencing. The use of open PC architecture and standard Microsoft(R)
operating systems allows users to bring virtually any kind of data into a
meeting or training environment. These new visual communications systems allow
access and sharing of any information available on the World Wide Web, data that
resides on an organization's Local Area Network or Intranet, or local PC files
and software applications. The majority of our systems are built upon a system
platform that is based on industry-standard, PC-compatible open hardware and
software architecture. The PC-architecture also provides a natural pathway to
connect VTEL's visual communication systems to either Internet Protocol (IP)
networks or traditional telephone networks on a call by call basis through
simple software commands. Our network management software uses industry standard
protocols to allow large visual communications networks to be operated in the
same manner currently used in traditional data networks, thereby leveraging the
rapidly expanding network infrastructures being deployed in organizations
throughout the world. VTEL's streaming video software allows users to "webcast"
events live over an internal network or the Internet and store any multimedia
content for convenient, on-demand playback. We offer a wide range of global
professional services to assist customers in designing, installing, operating
and supporting organizational visual communications networks worldwide.
The cornerstone of VTEL's business strategy is to identify end-user
customer markets that can most benefit from the advanced functionality of our
multi-media visual communication systems and to focus a substantial portion of
its sales and marketing efforts on these targeted markets. Consistent with this
strategy, VTEL has targeted the manufacturing, education, government, health
care, and financial institution market segments and certain portions of the
general business market. VTEL primarily distributes its systems through
third-party resellers which include major telecommunications providers and
distributors such as Ameritech, Bell South, GTE, MCI, Norstan, PacBell, SBC,
Sprint, US West and other value-added resellers. We have built an extensive
marketing and sales organization to support our third-party resellers. This
organization provides marketing programs; field support personnel including
sales managers, system engineers, and business development managers; and
personnel with industry expertise to implement our targeted market strategy.
Since VTEL's inception, it has sold more than 30,000 visual communication
systems.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger of VTEL-Sub,
Inc., a Delaware corporation and direct wholly-owned subsidiary of VTEL (the
"Merger"), with and into CLI, pursuant to an Agreement and Plan of Merger and
Reorganization, with CLI becoming a direct wholly-owned subsidiary of VTEL. As a
result of the Merger all of the outstanding common and preferred CLI shares were
exchanged for a total of 8,424,741 shares of VTEL Common Stock. The acquisition
was accounted for as a pooling of interests.
On March 9, 1999, VTEL completed the acquisition of substantially all
of the assets of Vosaic LLP, an Internet video software and technology company
for $3.2 million in cash, stock and warrants. The transaction was accounted for
as a purchase of assets. The acquisition involved the issuance of 1,149,000
shares (equivalent to approximately 5% of the outstanding shares of VTEL's stock
as of March 9, 1999). VTEL acquired the core team, originally associated with
the University of Illinois, who pioneered the first multimedia Web Browser, and
has refined scalable video delivery technologies to stream and store video
information securely with high Quality of Service (QoS).
As part of VTEL's initiative to expand its international presence, we
consummated the acquisition of certain of the assets of the videoconferencing
division of one of our German resellers effective July 1, 1998. The
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consideration paid by VTEL consisted of restricted stock, warrants, a note
payable, and the assumption of certain payables and other liabilities
for total consideration of approximately $1,871. In September 1998, VTEL compl-
eted the acquisition of one of its French resellers through the issuance of res-
tricted stock.
VTEL's executive offices are located at 108 Wild Basin Road, Austin,
Texas 78746, and its telephone number is (512) 437-2700.
INDUSTRY BACKGROUND
Visual communications systems enable users at remote locations to meet
and share information face-to-face. A wide range of business or professional
meetings, education and training classes, and technical or medical consultations
make use of this innovative technology to reduce operating costs, improve
customer services, reduce cycle times, and improve intra- or inter-company
communications. A videoconference entails the transmission of video, audio and
data signals between two or more locations over a network connection. Video,
audio and data conferencing involves a large amount of digital information. In
order to transmit this information over digital networks, the video, audio and
data signals must be digitized and compressed without substantially reducing the
information content. Improved compression algorithms reduce transmission costs
by allowing more information to be sent over lower capacity digital networks.
Improved quality and lower costs of videoconferencing systems and network
services have made videoconferencing applications more attractive to a broader
group of users worldwide. Also contributing to the wider use of
videoconferencing is the increased availability of switched digital telephone
service and the use of Internet Protocol networks, allowing a videoconference to
be initiated with nearly the ease of a normal telephone call.
The major change occurring in the industry today involves the evolutionary
migration of telecommunications networks from circuit-switched technology (like
traditional telephone lines) to packet-switched technology (Internet Protocol
networks). We are ideally positioned to take advantage of this change because
our underlying product technology is built upon an open PC architecture. In
October 1999, VTEL introduced its new product line of Galaxy(TM) visual
communication systems. The enhanced software included in the Galaxy(TM) line can
accommodate and support customer migration to Internet Protocol networks easily
because these endpoints can operate on either type network and move from one
network architecture to another on a call by call basis through simple software
commands. For many customers that previously purchased VTEL products, the
migration to Internet Protocol network functionally can be accomplished through
software upgrades to existing products.
Videoconferencing systems are also becoming simpler to use. Current
videoconferencing systems can be configured as "set-top" appliances or
"roll-about" room systems that can be used without the need for trained
operators or special room requirements. In general, the videoconferencing market
can be grouped into four complementary categories: personal conferencing,
set-top conferencing, workgroup conferencing, and group conferencing. The
personal conferencing market is targeted at the individual. As such, solutions
are typically priced in the $1,000 to $7,000 range. The set-top conferencing
market is targeted at groups of two to three individuals. Systems in this market
range from $4,995 to $9,000. The workgroup conferencing market is targeted at
the project teams or executive offices that require collaborative data and
software interaction. Solutions in this market range from $9,995 to $15,000. The
group conferencing market is targeted at larger groups, typically eight or more
individuals. Application uses vary greatly from boardrooms to large classrooms.
These group systems are priced at $8,500 and above.
Another factor contributing to the growth of videoconferencing is the
continuing emergence of international industry standards designed to allow
interoperability of videoconferencing systems manufactured by different vendors.
The International Telecommunications Union ("ITU-T") sets international
standards used by the industry. VTEL has been a leader in promoting standards
across the industry and delivers standards-based products to its customers.
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While technological advances and market receptivity have increased the use
of videoconferencing, traditional audio and video videoconferencing alone lacks
the functionality and effectiveness of face-to-face meetings in many
applications. We believe that, for certain applications, users are seeking
conferencing features, in addition to audio and video, that allow for the
exchange of information and interaction through a variety of media. For example,
engineers can communicate and solve problems more effectively by supplementing
the videoconference with shared media, such as graphics with annotations,
computer programs, document exchanges and whiteboards, which results in a better
replication of the impact and effectiveness of a face-to-face meeting. VTEL has
taken a leadership position in this form of high-value visual communication
technology due to its open PC platform and flexible architecture.
CORPORATE STRATEGY
VTEL's primary focus is on high-value visual communication systems
which provide high functionality tailored to the needs of our targeted markets.
This results in a range of offerings from desktop to boardroom applications. The
following are the components of VTEL's corporate strategy:
PRODUCT DIFFERENTIATION. VTEL's strategy is to differentiate its
products from the products marketed by its competitors. Key elements of this
strategy are as follows:
Open Architecture. VTEL's principal visual communication systems are
built upon a system platform which integrates video, audio and data compression
technologies in a PC-compatible open hardware and software architecture. This
open architecture allows VTEL to accelerate the development process through the
use of commonly available, low-cost hardware and software components and the
incorporation of third-party technological developments. VTEL's PC-based system
platforms are field-upgradable and easily accommodate software upgrades, thereby
extending the useful life of the customer's investment and providing us with
incremental revenues through these upgrade sales. In October 1999, we began
shipping our Galaxy(TM) line of visual communication systems. The new line is
distinguished by a new more intuitive user interface software (Vtouch TM) that
offers the additional functionality of H.323 (or Internet Protocol) networking
capability. Because VTEL's systems are PC-based, existing customers of our later
generation ESA(TM) line of visual communication systems will be able upgrade to
the latest features of the Galaxy(TM) line.
Centralized Management and Administration. Using the industry standard
Simple Network Management Protocol ("SNMP"), VTEL is able to centrally manage
and administer large, distributed visual communication networks. VTEL's
SmartVideoNet Manager product provides advanced functionality for management in
the videoconferencing industry. It leverages the industry standard SNMP for
statistics, controls, and alerts. These functions allow for centralized problem
determination and resolution, thereby eliminating the requirement for on-site
expert personnel to support the system. An additional benefit of SmartVideoNet
Manager is the ability to establish video calls from a centralized console with
no local user intervention. Using this, meeting participants simply arrive at
the conference room or classroom and the video call is already in session
waiting for their participation.
Consistent Operating Platform. An important characteristic of each
product in the family is the consistent use of standard Microsoft operating
systems (Windows 95(R), Windows 98(R), Windows NT(R)). This consistency combines
the PC-microprocessor architecture with a recognized software platform and
provides a familiar look and feel for the user throughout the product family
architecture. Windows operating systems support a wide variety of software and
hardware applications that can be integrated into a videoconference as
stand-alone features or as shared applications by visual communication users
through our collaboration capability.
Multi-media Functionality. VTEL's visual communication systems provide a
wide range of functions that utilize a variety of media and more closely
replicate the impact and effectiveness of face-to-face meetings. These
functions, referred to by VTEL as visual communications technology, combine
video and audio, document exchange,
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shared whiteboard and computer application sharing. VTEL strives to make this
functionality easily accessible to the user. Our Pen Pal Graphics and
AppsView(TM) user interfaces were designed to make our group systems easier to
use and are fully integrated on VTEL Team Conferencing and Leadership
Conferencing systems. Galaxy's(TM) new Vtouch(TM) graphical user interface
builds upon the success of these earlier efforts to provide even easier system
operation. Both AppsView(TM) and Vtouch(TM) are customizable user interfaces
that run on a Microsoft Windows(R)operating system. They integrate all
application functions under a software defined interface which can be customized
by the user to meet specific needs.
Standards Compliance. VTEL believes the continued adoption and
implementation of industry standards for interoperability are critical to the
continued growth of the videoconferencing market. All of our visual
communication systems and multipoint products comply with the leading ITU-T
standards for videoconferencing. VTEL's platforms also comply with an extensive
array of additional communications and computer industry standards, both formal
and de facto (such as ISA, PCI, Intel x86, SNMP, and Microsoft Windows(R)),
involving video, audio, graphics, communications, computers, peripherals, and
network management. We have been an active participant on the relevant ITU-T
committees and intend to continue to promote both acceptance of the standards by
all vendors and formal compliance testing to assure interoperability.
Network Integration Capabilities. The PC-based open architecture design of
VTEL's products provides a natural pathway to connect our visual communication
systems onto local area networks (LANs) and wide area networks (WANs), thereby
leveraging the rapidly expanding network infrastructures being deployed in
organizations throughout the world. We believe that not only will such networks
continue to expand globally, but the capability to centrally manage large
internationally dispersed networks will become a requirement for the successful
establishment of such networks. We believe that development of network
integration and network management capabilities will be an important success
factor to our strategy. The VTEL Network Assured Program was initiated with the
goal of ensuring interoperability between the various networking systems in the
marketplace and VTEL's videoconferencing equipment. This program offers the
customer, who must interface with the different major equipment vendors, the
peace-of-mind they are seeking as they integrate multivendor equipment on a
network. To facilitate an easy migration into the new realm of IP
communications, VTEL is collaborating with vendors of network services including
Cisco, GTE Network Services, IXC Communications and Ezenia! to enable seamless
integration between VTEL's H.323-based product line and their product line.
Service and Systems Integration Capabilities. VTEL's Global Services
division offers installation, integration and support services to customers of
its products. Most sales occur through resellers to the end users of our
products. This offering of services enhances VTEL's resellers' ability to sell
our visual communication systems and to generate additional revenues to VTEL
from the sales of such services. During fiscal 1999 Global Services expanded the
capabilities offered to our resellers by building application-specific systems
that address individual users' needs. This service excelled where resellers
expressed the need to deliver a system requirement that could be duplicated many
times within a market or region. Projects were typically priced in the range of
$100,000 to $300,000. The building of application-specific systems for a
reseller further differentiates VTEL and its hardware/software solutions. VTEL
intends to expand in this area in fiscal year 2000.
TARGETED MARKETS. The cornerstone of VTEL's business strategy is to
identify end-user customer markets that can most benefit from the advanced
functionality of our multi-media visual communication systems, and to focus a
substantial portion of our sales and marketing efforts on these targeted
markets. Consistent with this strategy, VTEL has targeted the manufacturing,
education, government, health care, and certain portions of the business market.
VTEL continues to focus on those markets in which it has the highest potential
for increasing its market share. We currently enjoy a leadership position in the
education market with installations at secondary and higher education systems
throughout the world.
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DISTRIBUTION STRATEGY. VTEL believes that a well-executed distribution
channel is critical to marketing success. VTEL currently relies on third party
resellers to sell, install and support its visual communication systems in an
effort to leverage the sales forces of the resellers that are already providing
telecommunications and systems integration services to potential purchasers of
visual communication systems. All major resellers maintain demonstration
networks, with trained sales and support personnel.
Consistent with its focus on its targeted market segments, we work with
a number of VARs that specialize in specific applications, geographic areas and
markets such as education, health care, project management and government
procurement. Typically, VTEL's agreements with its resellers and VARs involve
non-exclusive arrangements which may be canceled by either party at will and
contain no minimum purchase requirements on the part of the resellers.
VTEL also sells products directly to certain end-user customers,
generally large global end user customers which have sophisticated global visual
communication networks and require much more involvement to support the sale,
installation and maintenance of the network. These sales are mostly completed
through VTEL's Global Service division.
PRODUCTS
We offer a complete line of interoperable multi-media visual
communication systems. VTEL differentiates its systems from competitive products
by a high level of advanced functionality, such as presentation graphics and
access to PC-based software and hardware peripherals. Because VTEL systems are
based on open PC-architecture, and most functionality is contained in software,
many system upgrades are accomplished via software, enabling customers to
protect their investment in our systems. VTEL systems may be configured with LAN
connections so that data and presentations may be created at an individual PC
workstation, stored on the LAN and retrieved by the visual communication system
for presentation or transfer to the remote location during a videoconference.
Videoconferences can range from simple point-to-point connections
between two locations of a single organization to connections between multiple
locations of multiple organizations in several countries. VTEL's primary visual
communication products are based upon one of three architectures, the
SmartStation Architecture (SSA) for personal and workgroup visual communication,
the Enterprise Series Architecture (ESA) for group conferencing, and the
TurboCast(TM) Architecture for Internet targeted visual communications
solutions.
ENTERPRISE SERIES ARCHITECTURE PLATFORM. VTEL's Enterprise Series
Architecture(TM) ("ESA") is the hardware and software platform for a family of
products designed to meet the needs of large and small groups. The ESA platform
is a PC-based, open architecture visual communication system configured around
an Intel Pentium(TM) PC chassis containing the ESA(TM) video-audio processing
boardset. The ESA(TM) system contains, in addition to the standard internal disk
drive and 3.5 inch floppy drive, a CD-ROM drive as well as an expansion chassis
which contains all the audio and video input/output ports. The ESA(TM) platform
utilizes the Microsoft Windows(R) operating system as its software platform and
incorporates either the AppsView(TM) software user interface and control system
or its newly released Galaxy(TM) Vtouch(TM) software user interface and control
system. Through AppsView(TM) or Vtouch(TM), the user controls all conference
functions with on-screen software icons which may be customized for each user or
application. The ESA platform contains open PC card slots for
application-specific peripherals.
The ESA(TM) platform supports industry standards for video, audio and
data compression and is interoperable with any other system supporting the H.320
standard using the AppsView(TM) software, and both H.320 and H.323 using the
Galaxy(TM) software . The platform operates over digital communication
bandwidths transmitting at data rates from 56 Kbps to T1 or E1 rates in
point-to-point and multipoint conferences. ESA connections can be made over
public dial-up digital networks or private digital dedicated facilities. During
fiscal 1999, ESA connectivity was expanded to include Internet Protocol networks
through a hardware addition. ESA systems may also be upgraded to H.323 (Internet
Protocol) with our new Galaxy(TM) software.
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Configurations of the ESA(TM) platform with AppsView(TM) include VTEL's
Team Conferencing(TM) ("TC") and Leadership Conferencing(TM) ("LC") Systems.
These systems are single or dual monitor systems built on the ESA platform and
designed to provide mid-range products for users seeking high quality video and
audio and visual communication capability in a small to mid-sized group setting.
Data rates from 56 Kbps to 512 Kbps are provided on all systems and high speed
data rates up to T1 or E1 for the high end LC systems. The systems provide
higher performance PC-based functionality through the use of the Intel
Pentium(TM) microprocessor, inclusion of a CD-ROM drive, the Microsoft
Windows(TM) operating system and the AppsView(TM) user interface. Product
features include LAN connectivity, Internet access, both document and computer
conferencing, 30 frame per second video and capability of including software
applications designed for Microsoft Windows(TM) as part of the videoconference.
The TC systems have suggested list prices of $11,700 to $40,995 and LC5000
configurations vary in price from $54,995 to $59,495
Configurations of the ESA(TM) hardware platform with Galaxy(TM) include
several new Products: Galaxy Model 725, Galaxy Model 755, Galaxy Model 2500 and
Galaxy Model 5500. This new family of products provide the competitive price
performance characteristics required by customers across the wide range of group
system applications. The products provide state of the art video and audio with
high resolution slide capture and send graphics. The systems are H.323 capable
for videoconferencing over Internet Protocol Networks and/or H.320 capable for
videoconferencing over traditional circuit switched networks. Within this
product family there are solutions that support single or dual monitor
configurations, and data rates from 56kbps to 1920Kbps (T1/E1). All are
supported by the new Vtouch(TM) graphical user interface.
WG500. The WG500 is a series of workgroup visual communication systems
targeted at the project team or executive office where the ability to share and
interactively create a work product is required. As such, it is designed to
utilize industry leading collaborative multi-media tools such as Microsoft
NetMeeting(TM). Based on a high performance, multi-media PC platform, the WG500
fills the price-point and functionality gap between the personal desktop
conferencing market and the large group conferencing market. The WG500 has
suggested list prices of $9,995 to $14,995
SETTOP 250. The SETTOP 250 was the first business-class, set-top
videoconferencing system in the industry priced under $5,000. Combining
ease-of-use with high-quality features, the SETTOP 250 is the solution for
enterprise users who require entry-level group conferencing with
industry-standard voice and video. The SETTOP 250 includes an intuitive user
interface, an easy, color-coded installation process, and comes in both 128 Kbps
and 384 Kbps models.
SMARTSTATION. The SmartStation(TM) converts a Windows-based PC into a
videoconferencing system for personal use. Incorporating the performance of the
ESA(TM) products with its high-quality audio and video, the SmartStation(TM)
allows users to collaborate while still leveraging the power and versatility of
their desktop PC. In one easy-to-install package, SmartStation(TM) includes
VTEL's AppsView(TM) graphical conference control interface for consistent
operation across many of VTEL's visual communication solutions. SmartStation(TM)
supports data rates up to 384 Kbps for high-quality desktop conferencing and
supports the T.120 standard for data collaboration by integrating Microsoft
NetMeeting 2.0(TM).
SMARTVIDEONET MANAGER(TM). SmartVideoNet Manager(TM) software is a
tool designed to help customers simplify the administration of video networks
and reduce the operating costs. Based on the Windows NT platform and utilizing
the SNMP communications protocol, SmartVideoNet Manager(TM) leverages the
PC-based architecture of our systems to allow customers to use their existing
Intranet to provide continuous monitoring of their video network. SmartVideoNet
Manager(TM) allows administrators to remotely control, configure, diagnose and
troubleshoot VTEL systems, all from a PC console.
NETWORK EQUIPMENT. VTEL carries an extensive line of equipment to
optimize connectivity in a variety of network environments. In order to maximize
communication effectiveness, many customers choose to purchase multipoint
control units to link multiple users into a single meeting. The SmartLink
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Multimedia Conference SERVER(TM) ("MCS") is the hub of a videoconferencing
meeting, allowing interactive communications with up to 48 participants. The
SmartLink MCS(TM) provides translation capabilities for a number of line rates
and video and audio algorithms to ensure maximum flexibility. Additionally, the
SmartLink MCS(TM) is manageable through SmartVideoNet Manager(TM). SmartLink
MCS(TM) configurations range in price from $19,480 to more than $150,000 for
advanced configurations.
TURBOCAST. The TurboCast(TM) software allows customers to capture,
store, distribute, and view media streams across the Internet and to be accessed
by clients using standard web browsers. The TurboCast solution consists of three
principal components: Studio, Reflector, and Viewer. The Studio and Reflectors
work together to capture and distribute live or stored multimedia content. The
TurboCast Viewer, implemented as a lightweight Java(R) applet, allows a media
stream to play directly within browsers such as Microsoft Internet Explorer(R)
and Netscape Navigator(R), without downloading additional software.
Since TurboCast(TM) can be used with any Java(R)-enabled browser,
broadcasts can be viewed on PC, Macintosh and Unix systems as well as some
Java(R)-based hand-held consumer devices. Current TurboCast products include:
TurboCast Studio which allows events to be captured for live broadcasts or
time-shifted replays using a standard video camera and PC or VTEL's Enterprise
Series videoconferencing systems.
PRODUCT DEVELOPMENT
VTEL's product development strategy is to design and develop core
systems capabilities and leverage the availability of hardware peripherals and
application software from third parties and to efficiently integrate such third
party resources into its systems. Additionally, with the acquisition of the
Internet streaming technology obtained with the purchase of Vosaic, we intend to
continue to introduce products that incorporate streaming technology. To the
extent that market needs cannot be met by available third party resources, we
may undertake the development of such resources. The following represent
development efforts that have been undertaken by VTEL:
SOFTWARE SYSTEM PLATFORM. The SmartStation(TM) Architecture and
ESA(TM) hardware platforms support our proprietary software architectures. The
characteristics of our products are developed and implemented primarily through
software, facilitating upgrades for users and the rapid incorporation of new
technologies. Upgrades are modular in nature, allowing additional licensed
program products to be added incrementally to the user's basic system. Our
software products are developed primarily in "C", a commonly-used, high-level
programming language, to provide future portability to other hardware platforms.
Development resources are being applied to the creation of new system software
and program products for increased functionality and flexibility of the
platform.
PERSONAL VISUAL COMMUNICATION SYSTEMS. Increased performance of
semiconductor processors specifically designed for video and image processing
allow for the cost-effective design and packaging of small group visual
communication systems and high functionality personal desktop systems that are
compatible with small and large group visual communication systems. We
introduced the SmartStation(TM) visual communication cardset which was developed
utilizing the capability of our visual communication software ported to a
suitable hardware platform. The principal hardware-related resource commitment
in the development process is the effort to find and test boardset candidates
for suitability for VTEL's software.
AUDIO COMPRESSION/ECHO CANCELLATION. Audio quality is an important
element in any video conference. At lower transmission rates, the amount of
bandwidth allocated to audio decreases, thereby requiring audio compression
algorithms to maintain acceptable audio quality. VTEL produces its own
proprietary, integrated echo canceller to improve audio quality. We offer audio
compression capability at allocated bandwidths of 8, 12, 32 and 74 Kbps through
audio subsystems.
VIDEO/IMAGE COMPRESSION. VTEL's continuing video compression
development activity is focused on the refinement of both H.320 and H.323
algorithms for higher resolution video capabilities and the integration of that
technology. Shortly following the merger with CLI in 1997, VTEL announced
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StandardsPlus(TM) Video which provides improved video quality using industry
standards. Significant video quality improvements using industry technology
standards were achieved via a collaborative development effort between VTEL
engineers in Austin and Sunnyvale.
NETWORK MANAGERS. In the summer of 1997, VTEL introduced the industry's
first standards-based management and administration platform for distributed
visual communication networks. Using the SNMP standard, SmartVideoNet ManagerTM
allows VTEL customers to centrally control their visual communication network
for functions such as problem determination, problem resolution, call setup and
conference statistics. Using this management framework, conference support can
be provided centrally with no requirement for local user intervention, even for
networks with hundreds of visual communication system endpoints.
INTERNET TECHNOLOGIES. In 1999 VTEL launched several development
initiatives aimed at harnessing the emerging power of the Internet with its
associated technologies. The Internet will benefit VTEL on several fronts.
First, as a widely distributed and accessible "data network", the Internet
eventually will surpass in usage any data communication infrastructure based on
dedicated transmission media, initial bandwidth limitations notwithstanding. By
acquiring Vosaic, a University of Illinois-based Internet start-up, in 1999,
VTEL has begun to aggressively address the need to adapt its core
video-conferencing expertise to this new transmission medium.
Second, as an increasingly popular e-commerce infrastructure, the
Internet offers unprecedented access to new markets and customers without the
need to rely on intermediaries. By expanding its video-conferencing products
from hardware - software combination products into pure software solutions that
can run on any personal computer, VTEL can also harness the Internet as a
distribution and sales channel for its new generation of products without the
need for storing and shipping physical hardware. Sales, marketing, and
distribution of its products can all occur via the Internet.
VTEL's Internet products will be launched in several waves, all relying
on the same bandwidth optimizing technology and no-download viewing
capabilities. The first wave of products will be aimed at one-way streaming of
mostly archived, but in some cases also live visual content. A video-mail type
product will thus lead the way with the associated server and hosting
infrastructure. This product will be closely followed by a wave of visual
applications aimed at several specific OEM opportunities as well as the distance
learning market in general. The subsequent wave of products will expand the
interactive capabilities of the first thus broadening their market
applicability.
PRODUCT SUPPORT AND EXPANSION OF SUPPORT CAPABILITIES
Currently, end-user support and installation of our products are
provided by resellers and VARs, by Dictaphone in the United States, Fujitsu/Bell
Atlantic and ICL Sorbus (a wholly-owned subsidiary of Fujitsu/Bell Atlantic) in
most foreign markets as third-party service providers or directly by VTEL in
order to provide a comprehensive service offering for its worldwide customer
base. We train the service employees of Dictaphone, Fujitsu/Bell Atlantic and
ICL Sorbus and VTEL's resellers on diagnostics and service of its products.
Dictaphone, Fujitsu/Bell Atlantic and ICL Sorbus and the reseller service
network are supported by trained technicians at VTEL's Technical Assistance
Center. In order to meet all of its service commitments, we currently employ our
own field service engineers as well as maintain contracts with third party
Certified ISO technicians.
COMPETITION
The videoconferencing industry is highly competitive. VTEL believes
that the principal competitive factors in the industry are product architecture,
ease of use, video and audio quality, functionality, service and support, market
visibility, and price. We face competition from a number of companies that
market communications systems for videoconferencing. Currently in the United
States, PictureTel Corporation, Sony Corporation, Nippon Electric Corporation,
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Polycom Corporation, and Tandberg ASA, among others, are marketing roll-about
group videoconferencing systems and multipoint control units. Internationally,
videoconferencing systems are available from, among others, British
Telecommunications plc., PictureTel Corporation, Sony Corporation, Nippon
Electric Corporation, Mitsubishi, Ltd., Fujitsu, Ltd., Panasonic Ltd., Polycom
Corporation, and Tandberg ASA.
Certain of our competitors have devoted significant resources to the
development and marketing of person-to-person visual communications products,
such as desktop videoconferencing systems, set-top systems, and software-based
internet/intranet visual communications systems, which may help to increase
awareness in the value of visual communications products while also resulting in
increased competition. Microsoft has introduced visual components to its
NetMeeting Release 2.0(TM) product. We intend to continue to focus on large-,
small-, and work-group visual communication systems, in addition to gateways and
other products, where we believe we can add significant value through software,
user interfaces, integrated environments, and applications designed to meet the
needs of its targeted markets. Additionally, we recognize that as streaming
technology proliferates over the Internet, there will be increased competition
directed toward our Internet products.
Our competitors and many of our potential competitors are more
established, benefit from greater market recognition, and have greater
financial, technological, production, and marketing resources than we do. It is
possible for these factors to have an adverse impact on our competitive
position.
MANUFACTURING
VTEL's manufacturing operations consist of integration and testing of
subsystems and assemblies. Our manufacturing strategy is to contract work to
established vendors, with VTEL fulfilling the quality and materials management
functions. Substantially all of the integrated circuits, subsystems and
assemblies used in our products are made to our specifications by third parties
under contract. We establish the relationship with the component vendors,
qualifies the vendors and arranges for shipment to VTEL or directly to the
vendor responsible for the next level of integration. Systems must pass several
levels of testing, including testing with current-release software, prior to
shipment. Our manufacturing quality system was initially certified in December
1994 as meeting the standards of ISO 9002 as set by the International Standards
Organization. VTEL has passed subsequent audits with only minimal corrective
action needed.
We rely on outside vendors for supplying substantially all of our
electronic components, subsystems and assemblies. Although we use standard parts
and components for our products that are generally available from multiple
vendors, certain components are currently available only from sole sources and
embody such parties' proprietary technology. We depend upon our suppliers to
deliver products that are free from defects, competitive in functionality and
price and consistent with our specifications and delivery schedules. The failure
of a supplier to provide such products could delay or interrupt our manufacture
and delivery of products and thereby adversely affect our business and operating
results. We endeavor to mitigate the potential adverse effect of supply
interruptions by carefully qualifying vendors on the basis of quality and
dependability and by maintaining adequate inventories of certain components.
However, there can be no assurance that such components will be readily
available when needed. Similarly, excessive rework costs associated with
defective components or process errors could adversely affect our business and
operating results. We do not have contracts with many of our suppliers ensuring
continued availability of key components.
VTEL attempts to forecast orders and to purchase certain long lead-time
components in advance of receipt of purchase orders from customers to enable us
to provide timely deliveries to customers when customer orders are received. In
addition, from time to time we enter into development arrangements with other
third parties to develop and incorporate new features and functions into our
products. As such, we are dependent upon these third parties to fulfill their
respective obligations under these development arrangements, and failure of
these third parties to do so could have a material adverse effect on our results
of operations.
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PATENTS AND TRADEMARKS
VTEL has 24 patents issued by the United States Patent and Trademark
Office and 15 patent applications pending related to our technology.
There can be no assurance that the pending patents will be issued or
that issued patents can be defended successfully. However, we do not consider
patent protection crucial to our success. We believe that, due to the rapid
pace of technological change in the videoconferencing industry, legal protection
for our products are less significant than factors such as our use of an open
architecture, the success of our distribution strategy, the ongoing product
innovation and the knowledge, ability and experience of our employees.
VTEL has been issued two trademarks and two service marks by the United
States Patent and Trademark Office covering the "VTEL" mark and our logo as well
as trademarks and service marks issued by certain foreign countries and
entities. Applications for other trademarks are currently pending both in the
United States and abroad.
EMPLOYEES
At July 31, 1999, we employed 617 full-time employees as follows:
NUMBER OF
FUNCTION EMPLOYEES
Sales and marketing 224
Research and development 113
Service, support and
systems integration 143
Manufacturing 50
Finance and administration 87
=============
Total 617
=============
Our continued success will depend, in large part, on our ability to
attract and retain trained and qualified personnel who are in great demand
throughout the industry. None of our employees are represented by a labor union.
We believe that our employee relations are good.
VTEL's development, management of its growth and other activities de-
pend on the efforts of key management and technical employees. Competition for
such personnel is intense. We use incentives, including competitive compensation
and stock option plans, to attract and retain well-qualified employees. There
can be no assurance, however, that we will continue to attract and retain
personnel with the requisite capabilities and experience. The loss of one or
more of our key management or technical personnel also could have a material and
adverse affect. VTEL generally does not have employment agreements with its key
management personnel or technical employees. Our future success is also
dependent upon our ability to effectively attract, retain, train, motivate and
manage our employees. Failure to do so could have a material adverse effect on
our business and operating results.
EXECUTIVE OFFICERS
Our executive officers are as follows:
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STEPHEN L. VON RUMP, age 41, was appointed President of VTEL in July
1999. He joined VTEL as Chief Marketing Officer in September 1998. Prior to
joining VTEL, Mr. Von Rump spent thirteen years at MCI Corporation most recently
as Vice President, Enterprise Services Marketing where he was responsible for
their data and Internet services strategy. As one of MCI's top data marketing
executives, he lead the transition of their enterprise business offerings from
legacy data services into the new era of virtual data and internet services.
Prior to MCI, Mr. Von Rump was a member of the technical staff at AT&T Bell
Laboratories. He holds a master's degree in electrical engineering, has authored
numerous technical and marketing publications and served as keynote speaker for
numerous professional conferences in the U.S. and abroad.
RODNEY S. BOND, age 55, joined VTEL in May 1990 as Chief Financial
Officer, Vice President - Finance and Assistant Secretary and Treasurer. He has
served as Secretary of VTEL since February 1993 and is now Assistant Treasurer
as of February 1999. From 1989 until he joined VTEL, he served as Managing
Director of Sherman Partners, a Dallas-based private investment and consulting
firm. From September 1985 to October 1988, Mr. Bond served as Chief Financial
Officer and Executive Vice President of Advanced Business Communications, Inc.,
a telecommunications equipment manufacturer.
DENNIS M. EGAN, age 48, joined VTEL in November 1995 as Vice President
- - Service. From January 1993 to November 1995, Mr. Egan served as Senior Vice
President of Peirce-Phelps, Inc. From June 1985 to January 1993, Mr. Egan was
Vice President and General Manager of the Integrated Communications Systems
Group of Peirce-Phelps. Mr. Egan's pre-1985 experience includes 13 years serving
in various sales and management positions with Peirce-Phelps.
DIANNE B. JOHNSON, age 40, was appointed Treasurer in February 1999. She
joined VTEL in July 1988 and has held a variety of management positions in
finance and operations. From December 1984 to July 1988, Ms. Johnson served in
the role of Accounting Manager with Capitol City Contractors.
STEVE F. KEILEN, age 40, was appointed Vice President, Chief Marketing
Officer in April 1999. He joined VTEL in July 1998 as Vice President and General
Manager of Enterprise Systems. Prior to joining VTEL, Mr. Keilen served as the
Director for Systems Marketing - North America at Compaq Computer Corporation
and was Director of Desktop Marketing and Product Management at Digital
Equipment Corporation prior to the merger of these two companies. He previously
held management positions at Digital Equipment Corporation and Hewlett-Packard
Company.
F.H. (DICK) MOELLER, age 54, joined VTEL in October 1989 and is
currently Chairman of the Board of Directors. From 1989 to September 1998, Mr.
Moeller has also served as President and/or Chief Executive Officer of VTEL.
From May 1982 to October 1989, Mr. Moeller served as the founder and President
of ProfitMaster Computer Systems, Inc., a computer software firm specializing in
real-time financial management systems for retail point-of-sale applications.
Prior to founding such firm, Mr. Moeller spent 12 years with Texas Instruments,
Inc. during which he held a variety of management positions, most recently
serving as Advanced Systems Manager of its Computer Systems Division. Effective
in July 1998, Mr. Moeller also began serving as General Partner of SSM Ventures,
a venture capital company.
LY-HUONG T. PHAM, age 41, joined VTEL in October 1997 as Chief
Technology Officer and Vice President of Research and Development. From May 1992
to October 1997, Ms. Pham served in numerous senior management positions at
Apple Computer, most recently serving as senior director, Operating Systems
Technologies. Prior to Apple, Ms. Pham spent 12 years at Wang Laboratories where
she held a variety of technical and senior management positions.
12
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MICHAEL J. STEIGERWALD, age 40, joined VTEL in June 1998 as Vice
President and General Manager of the Professional Services strategic business
unit, based in King of Prussia, Pennsylvania. Mr. Steigerwald currently holds
the position Vice President Global Services. Prior to joining VTEL, Mr.
Steigerwald held the position of Vice President at Newbridge Networks, where he
lead the Global Service and Support organization responsible for their ViVID
Internetworking Products business unit. For thirteen years prior to his
experience with Newbridge Networks, Mr. Steigerwald held several services
management positions at Ungermann-Bass Networks, an early pioneer in the LAN
industry, with his last position being that of Vice President, Worldwide
Customer Care.
BOB R. SWEM, age 62, joined VTEL in September 1992 as Vice President -
Manufacturing. From June 1981 to July 1992, Mr. Swem held various positions with
the Austin Division of Tandem Computers, Inc., ranging from Manager of
Manufacturing to Director of Operations.
ITEM 2. PROPERTIES
VTEL's headquarters, product development, and sales and marketing
facility leases approximately 139,000 square feet in Austin, Texas under a lease
which expires in March 2013. During fiscal 1999, we reduced the workforce of
VTEL (see Restructuring Activities in Item 7.) and as a result were able to
sublet approximately 15,000 square feet during the later part of fiscal 1999 and
the first quarter of fiscal 2000. We believe that the remaining facilities are
adequate to meet our current requirements, and that suitable additional space
will be available, as needed, to accommodate further physical expansion of
corporate and development operations and for additional sales and marketing
offices. VTEL occupies approximately 60,000 square feet of a facility that is
situated in a light industrial area in Austin, Texas where our manufacturing,
training and spare parts depot are located. VTEL's manufacturing facilities and
equipment are currently utilized generally on a one-shift per day basis. Should
additional manufacturing capacity be needed during the next year, we believe
that it could provide the necessary manufacturing capacity through the addition
of work shifts or subcontractors and additional warehouse space.
VTEL leases 52,500 square feet in Sunnyvale, California under a lease
that expires in April 2008. We have a research and development group in our
Sunnyvale location. As a result of its restructuring activities, VTEL has sublet
approximately 5,200 square feet at its Sunnyvale location. VTEL's Professional
Services group occupies a facility of approximately 41,000 square feet in the
Philadelphia, Pennsylvania vicinity which is leased through June 2006.
ITEM 3. LEGAL PROCEEDINGS
VTEL is the defendant or plaintiff in various actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
Our wholly owned subsidiary, CLI, was previously involved in a legal
dispute with Philips Electronics North America Corporation ("Philips"). On May
25, 1999, we announced a compromise settlement agreement between Philips and
CLI. The settlement agreement, valued at less than $900,000, stipulates payment
by CLI in the form of cash and a future payment under a note, for $250,000 (see
Note 8 in the Consolidated Financial Statements), as well as warrants for VTEL
common stock. These amounts had previously been accrued as part of the reserve
for contingent liabilities related to the merger (see Note 1 in the Consolidated
Financial Statements). In addition, the settlement mutually releases each party
from all future claims, demands and causes of action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since April 7, 1992, VTEL's Common Stock has been traded in the
NASDAQ-National Market System under the symbol "VTEL". The following table sets
forth the range of high and low closing prices for each fiscal quarter of 1997,
1998 and 1999:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1997 1998 1999
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 10.625 $ 6.625 $ 8.875 $ 5.438 $ 5.875 $ 2.875
2nd Quarter $ 11.000 $ 8.250 $ 8.438 $ 5.625 $ 4.750 $ 2.500
3rd Quarter $ 8.625 $ 4.875 $ 7.688 $ 5.250 $ 9.250 $ 2.000
4th Quarter $ 7.125 $ 5.500 $ 7.063 $ 4.750 $ 6.500 $ 4.000
</TABLE>
VTEL has not paid cash dividends on its Common Stock and presently
intends to continue a policy of retaining earnings for reinvestment in its
business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data for VTEL as
of the dates and for the periods indicated. All such data reflects the Merger
with CLI on May 23, 1997, which was accounted for as a pooling of interests. The
consolidated operations data for the years ended July 31, 1997, 1998 and 1999
has been derived from the audited consolidated financial statements of VTEL
included elsewhere herein. The consolidated operations data for the year ended
December 31, 1995 and the seven months ended July 31, 1996 has been derived from
the audited consolidated financial statements of VTEL not included herein.
The consolidated balance sheet data as of July 31, 1998 and 1999 has
been derived from the audited consolidated financial statements of VTEL included
elsewhere herein. The consolidated balance sheet data as of December 31, 1995
and July 31, 1996 and 1997 have been derived from the audited consolidated
financial statements of VTEL not included herein.
The consolidated financial data as of July 31, 1995 and for the seven
months then ended have been derived from the unaudited consolidated financial
statements of VTEL not included herein. The unaudited consolidated financial
data include all adjustments, consisting of normal recurring adjustments, which
VTEL considers necessary for a fair presentation of its financial position as of
such dates and the results of operations and cash flows for such periods. The
selected financial data should be read in conjunction with the consolidated
financial statements of VTEL and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Restatement of the Consolidated Financial Information combines the
financial information of VTEL and CLI giving retroactive effect to the merger as
if the two companies had operated as a single company for all periods presented.
However, the two companies operated independently prior to the merger that was
consummated in May 1997 and the historical changes and trends in the financial
condition and results of operations of these two companies resulted from
independent activities.
14
<PAGE>
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR SEVEN MONTHS FOR THE YEARS
ENDED ENDED ENDED
DEC 31, JULY 31, JULY 31,
1995 1995 1996 1997 1998 1999
------------ ------ ------ ------ ------ ------
UNAUDITED
In thousands, except per share amounts
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 191,074 $98,079 $96,962 $ 191,023 $ 179,684 $ 151,602
Gross margin 66,843 39,971 35,980 74,702 84,957 67,238
Net income (loss) from continuing
operations (17,301) (4,335) (18,507) (44,271) 2,779 (15,565)
Net income (loss) (53,843) (3,811) (18,507) (52,054) 2,779 (15,565)
Net income (loss) per share from
continuing operations (0.90) (0.24) (0.87) (2.10) 0.12 (0.66)
Net income (loss) per share (2.81) (0.21) (0.87) (2.45) 0.12 (0.66)
BALANCE SHEET DATA:
Working capital $ 93,330 $76,023 $77,091 $ 39,528 $ 41,503 $ 28,135
Total assets 223,061 182,082 175,092 131,135 129,289 124,091
Long-term liabilities 985 1,278 - - 3,848 15,930
Stockholders' equity 139,512 126,739 122,238 76,765 81,258 68,019
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
On May 23, 1997, shareholders of VTEL and CLI approved the merger of
VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct
wholly-owned subsidiary of VTEL (the "Merger"). The restatement of the
consolidated financial information for the year ended July 31, 1997 combines the
financial information of VTEL and CLI giving retroactive effect to the Merger as
if the two companies had operated as a single company for the entire year. The
following discussion of the consolidated operations and financial condition of
VTEL should be read in conjunction with our consolidated financial statements
and related notes thereto included elsewhere herein.
The restatement of the consolidated financial information combines the
financial information of VTEL and CLI giving retroactive effect to the Merger as
if the two companies had operated as a single company for all periods presented.
However, the two companies operated independently prior to the Merger that was
consummated in May 1997 and the historical changes and trends in the financial
condition and results of operations of these two companies resulted from
independent activities. Nonetheless, the following Management's Discussion and
Analysis of Financial Condition and Results of Operations attempts to relate the
activities which resulted in the changes in financial condition and results of
operations of the combined company, taking into consideration that a trend or
change in the historical results of the combined entity was caused by many
events related to each individual company operating independently as
competitors. The financial information presented on a historical restated basis
is not indicative of the financial condition and results of operations that may
have been achieved in the past or will be achieved in the future had the
companies operated as a single entity for the periods presented. The following
discussion of the consolidated operations and financial condition of VTEL should
be read in conjunction with our consolidated financial statements and related
notes thereto included elsewhere herein.
RESULT OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of revenues represented by certain items in VTEL's consolidated
statement of operations:
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FOR THE YEARS ENDED
JULY 31,
1997 1998 1999
Revenues 100.0% 100.0% 100.0%
Gross margin 39.1 47.3 44.4
Selling, general and administrative 34.2 36.1 40.1
Research and development 12.8 11.1 11.8
Total operating expenses 62.9 46.8 54.7
Other income, net 0.6 1.1 0.1
Net income (loss) from continuing
operations (23.2) 1.5 (10.3)
Net income (loss) (27.3)% 1.5% (10.3)%
FOR THE YEARS ENDED JULY 31, 1997, 1998, AND 1999
Revenues
Consolidated revenues decreased from $191.0 million in fiscal 1997 to
$179.7 million in fiscal 1998 and to $151.6 million in fiscal 1999.
Revenues for the year ended July 31, 1998 decreased in comparison with
revenues for the year ended July 31, 1997 due to Merger transition issues.
During the year ended July 31, 1998, we combined the sales forces of VTEL and
CLI, migrated to a single product platform by eliminating the former CLI
platform, and combined the management and operations of the two companies into a
single organization. The primary reason for the decrease in revenues during
fiscal 1999 was the result of a decrease in unit sales of our large group visual
communications systems. The decline in revenues is also attributed to delays or
shifts in purchasing decisions of customers resulting from new product
announcements by VTEL and its competitors. We have determined that trends
presented by our customer base indicate shifts of capital spending. It appears
that customers may be delaying their purchase decision for large group systems
while they evaluate the impact of converting from videoconferencing systems
which currently run on digital (ISDN) type phone lines to systems which run on
Internet Protocol (IP) packet based networks. We anticipate that this trend will
reverse itself as we release products in fiscal 2000 that provide an IP network
solution.
We differentiate our operations between product and service. We feel
that our service capabilities set us apart from our competitors. Service
revenues have continued to increase over the last three fiscal years, and for
the years ended July 31, 1997, 1998, and 1999, services have represented 21%,
25% and 30%, respectively, of total revenues. Margins associated with our
service operations have continued to increase, for the years ended July 31,
1997, 1998 and 1999, gross margins for services increased to 28%, 36% and 37%,
respectively.
International sales as a percentage of total consolidated product
revenues were, 26%, 24% and 22% for the years ended July 31, 1997, 1998, and
1999. These revenue percentages represent export sales from our domestic
operations, as well as sales from our foreign subsidiaries. The general decline
in international sales over the three year period can be attributed to many
factors including the economic decline in the Far East and competition from
foreign producers of competing videoconferencing systems in Europe as well as
the Far East.
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VTEL primarily sells its products through resellers. For the years
ended July 31, 1997, 1998 and 1999 reseller sales were 75%, 77% and 80% of
product sales, respectively.
One of VTEL's initiatives is to grow revenues from non-U.S. markets.
Non-U.S. operations are subject to certain risks inherent in conducting business
abroad including price and currency exchange fluctuations and restrictive
government actions. We believe our foreign currency exposure to be relatively
low as foreign sales are predominantly in U.S. dollars. We use currency hedging
programs that utilize foreign currency forward contracts on a limited basis and
review the credit worthiness of our customers to mitigate foreign currency
exchange and credit risk. There can be no assurance that our foreign currency
hedging program will effectively hedge foreign currency exchange risk (see also
"Market Risk" below).
While we strive for consistent revenue growth, there can be no
assurance that consistent revenue growth or profitability can be achieved.
Consistent with many companies in the technology industry, our business model is
characterized by a very high degree of operating leverage. Our expense levels
are based, in part, on our expectations as to future revenue levels, which are
difficult to predict partly due to VTEL's strategy of distributing its products
primarily through resellers. Because expense levels are based on our
expectations as to future revenues, our expense base is relatively fixed in the
short term. If revenue levels are below expectations, operating results may be
materially and adversely affected and net income is likely to be
disproportionately adversely affected. In addition, our quarterly and annual
results may fluctuate as a result of many factors, including price reductions,
delays in the introduction of new products, delays in purchase decisions due to
new product announcements by VTEL or its competitors, cancellations or delays of
orders, interruptions or delays in supplies of key components, changes in
reseller base, customer base, business or product mix and seasonal patterns and
other shifts of capital spending by customers. There can be no assurance that we
will be able to increase or even maintain our current level of revenues on a
quarterly or annual basis in the future.
Gross margin
Gross margins were 39%, 47% and 44% for the years ended July 31, 1997
,1998, and 1999 respectively.
During the year ended July 31, 1997 VTEL's restated combined revenues
consisted of a higher proportion of revenues from CLI, which resulted in a lower
gross margin on a combined basis. The higher proportion of product revenues from
the large group visual communications systems using the ESA platform resulted in
a higher blended gross margin for the year ended July 31, 1998 as compared to
the year ended July 31, 1998. The lower gross margin percentage for the year
ended July 31, 1999 was the result of the shift by our customers to the purchase
of lower margin product segments as well as lower average sales prices brought
on by competitive price pressure. Gross product margins were also adversely
affected by excess manufacturing capacity as unit sales were lower than
initially anticipated. As we continue to grow our Global Services division, the
associated service and systems integration revenues which generally carry a
lower gross margin than our product revenues, may contribute to overall
downward gross margin pressure.
While many customers continue to delay the purchase of higher cost
large group systems, some are shifting to the purchase of lower cost small group
systems in order to maintain their visual communications networks with only a
moderate continued investment during the perceived industry transition. We
believe this transition will be driven by the shift to visual communications
systems which function within an IP network environment. As such, we anticipate
that lower gross margins will be offset by stronger unit sales as IP networks
proliferate.
We expect gross margin pressures due to price competitiveness in the
industry, shifts in the product sales mix and anticipated offerings of new
products, which may carry a lower gross margin. We expect that overall price
competitiveness in the industry will continue to become more intense as users of
visual communication systems attempt to balance performance, functionality and
cost. Our gross margin is subject to fluctuation based on pricing, production
costs and sales mix.
17
<PAGE>
Selling, general and administrative
Selling, general and administrative expenses of $60.9 million in fiscal
1999 decreased by 6% from $64.8 million in fiscal 1998, which decreased by 1%
from $65.4 million in fiscal 1997. Selling, general and administrative expenses
were 34%, 36% and 40% of revenues for the years ended July 31, 1997, 1998 and
1999.
Selling, general and administrative expenses as a percentage of revenue
increased from the year ended July 31, 1997 to the year ended July 31, 1998. The
proportionate increase was due to investments made during the year ended July
31, 1998 related to marketing and branding campaigns which were designed to
provide brand awareness for VTEL's products and to establish VTEL as an industry
leader in visual communications. Additionally, Merger transition issues related
to the combination of the sales forces of VTEL and CLI contributed to an
increase in selling, general and administrative expenses without a proportionate
increase in revenues.
Selling, general and administrative expenses as a percentage of revenue
increased from the year ended July 31, 1998 to the year ended July 31, 1999
despite a decline in total expenses. VTEL's expense levels were based, in part,
on expectations as to revenue levels. Because expense levels were based on our
expectations of future revenues, our expense base is relatively fixed in the
short term. For this reason, the selling, general and administrative expenses
were higher, as a percentage of revenues, for fiscal 1999 as compared to prior
periods.
Research and development expense
Research and development expenses of $18.0 million in fiscal 1999
decreased by 9.5% from $19.9 million in fiscal 1998, which decreased by 18.7%
from $24.5 million in 1997. Research and development expenses were 12.8%, 11.1%
and 11.8% of revenues for the years ended July 31, 1997, 1998, and 1999.
Merger-related expenses recorded during the year ended July 31, 1997 included a
$3.2 million charge for the write-off of capitalized research and development
cost incurred by CLI for products that were discontinued subsequent to the
Merger. Efficiencies were realized by combining the research and development
efforts of VTEL and CLI subsequent to the Merger and the Company migrated to a
single product platform by eliminating CLI's product platform. The research and
development capabilities of both companies were then focused on a single
platform such that Company could make a larger investment in its ESA(TM)
platform while reducing the overall research and development expenses of the
combined companies. Additionally, during the year ended July 31, 1998, we
capitalized $0.98 million of software development costs related to new product
developments resulting in a reduction in research and development expenses
recorded during the year.
The decrease in research and development expense from the year ended
July 31, 1998 to the year ended July 31, 1999 reflects the capitalization of
software development costs totaling $6.4 million. Research and development
projects being capitalized are related to the new user interface software
included with our next generation of video conferencing systems and software for
video conferencing solutions over IP networks. In October 1999, the user
interface software was released with our new Galaxy(TM) line of visual
communication systems. Software development costs are capitalized after a
product is determined to be technologically feasible and is in the process of
being developed for market. At the time of release, the capitalized software
will be amortized over the estimated economic life of the related projects.
During the year ended July 31, 1999, research and development expenses included
a charge for in-process research and development related to the acquired assets
of Vosaic (see "Acquisition" below). As part of the valuation associated with
Vosaic, we recorded a charge to research and development expense of $474,000.
The charge is based on our estimate of purchase price associated with research
and development on projects that were in-process at the time of acquisition. The
charge for research and development that was in-process relates to the next
generation video streaming product that was approximately 20% complete at the
date of acquisition.
The market for VTEL's products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions. New
products are generally characterized by increased functionality and better
picture quality at lower bandwidths and at reduced prices. The introduction of
18
<PAGE>
products, by either VTEL or its competitors, embodying new technology and the
emergence of new industry standards may render existing products obsolete and
unmarketable. Our ability to successfully develop and introduce on a timely
basis new and enhanced products that embody new technology, anticipate and
incorporate evolving industry standards and achieve levels of functionality and
prices acceptable to the market will be a significant factor in VTEL's ability
to grow and to remain competitive. Although the percentage of revenues invested
in research and development may vary from period to period, VTEL is committed to
investing in its research and development programs.
Merger and other expense
Merger and other expense decreased from $29.4 million in fiscal 1997 to
a $1.5 million credit to income in fiscal 1998 and a $0.2 million credit to
income in fiscal 1999. Merger and other expenses of $29.4 million recorded
during fiscal 1997 consisted of transaction expenses of $5.7 million and
restructuring and other expenses of $23.7 million. See Note 1 to the
Consolidated Financial Statements.
In connection with the Merger, we made the decision to discontinue the
CLI product-line and made the transition to a single product platform, VTEL's
Enterprise Series Architecture (ESA) platform. We also made the decision to
reduce duplicate operating functions, which resulted in a reduction in the
workforce of CLI. The merger transition plan also resulted in a charge in fiscal
1997 for the obsolescence of all the remaining CLI inventory related to the
discontinued products ($3.5 million) and the impairment of excess and
unproductive assets ($9.0 million). Asset impairment was determined by
estimating the lower of the asset's carrying amount or fair value less cost to
sell.
Management determined that, based on unanticipated favorable events
that occurred during fiscal 1998, including resolution of certain litigation and
other matters, a reversal of certain accruals totaling $2.6 million should be
recorded in fiscal 1998. Separately, a charge of $1.0 million was recorded to
reflect the final write-off and disposal costs of remaining discontinued CLI
inventory, which had previously been held for sale.
During the year ended July 31, 1999, the final significant contingent
liabilities, involving litigation in which CLI was a defendant, were either
settled or dismissed in court. Final Merger related payments totaling $1.3
million were paid during 1999. In addition, we recorded a note payable to
Philips Electronics North America Corporation for $0.3 million as part of terms
of that settlement agreement. Since no determinable contingent liabilities
remained in relation to the Merger, the final balance of accrued liabilities
totaling $0.2 million were returned as a credit to the Consolidated Statement of
Operations.
Restructuring Activities
In November 1998, management adopted a restructuring plan that is
intended to match the size and complexity of the organization with our planned
path. The plan included the involuntary reduction of 138 employees in 1999.
Terminations were generally made in all departments, including manufacturing,
sales, management and accounting, and were effective immediately for most
employees upon announcement. We also made the decision to reduce operating costs
by exiting other activities and reducing related overhead costs. These
activities included the closure of certain field sales offices and our
Sunnyvale, California spare parts depot.
As a result of the restructuring, we recorded a charge of $3.1 million
during the year ended July 31, 1999. As of July 31, 1999, substantially all of
the termination and severance benefits had been paid. The transition of the
spare parts depot in Sunnyvale was completed during 1999.
The following schedule summarizes the components and activities of the
restructuring plan:
BALANCE
RESTRUCTURING EXPENDITURES ACCRUED AT
CHARGE INCURRED JULY 31, 1999
Termination and severance
benefits $ 2,311 $ 2,293 $ 18
Facility closure and other
(primarily non-cancelable
lease obligations) 769 769 -
------- ------- ----
$ 3,080 $ 3,062 $ 18
======= ======= ====
19
<PAGE>
Interest income and expense
Interest income was $2.7 million, $1.2 million and $.8 million for the
years ended July 31, 1997, 1998, and 1999, respectively. Changes in interest
income are based on interest rates earned on invested cash and cash balances
available for investment. The decrease in interest income during fiscal 1998 is
the result of the reduced cash balances due to Merger related expenditures
incurred and primarily is the result of reduced cash balances due to operating
losses during fiscal 1999.
Interest expense was $1.6 million, $0 and $0.9 million for the years
July 31, 1997, 1998 and 1999 respectively. Interest expense for the year ending
July 31, 1997 relates almost entirely to VTEL's wholly-owned subsidiary, CLI,
which relied on lines of credit to fund working capital and capital investment
requirements. No interest expense was incurred during fiscal 1998 as we repaid
all outstanding debt prior to July 31, 1997. Interest expense during fiscal 1999
relates to borrowings under our line of credit as well as interest paid on notes
payable.
Income taxes
We have experienced substantial changes in ownership as defined by the
Internal Revenue Code. These changes result in annual limitations of the amount
of net operating loss carryforward generated prior to each change which can be
utilized to offset future taxable income. As a result of the ownership change at
CLI at the date of the Merger, a portion of CLI's net operating loss
carryforward generated prior to the Merger will never be available to offset
future taxable income due to the effect of the annual limitation and the
expiration of the related net operating losses. Therefore, the unavailable
portion of the net operating loss carryforward is not considered in determining
the deferred tax asset at July 31, 1999.
At July 31, 1999, VTEL had total domestic net operating loss
carryforwards of $113,948 ($40,530 and $73,418 for VTEL and CLI, respectively).
The portions of these carryforwards available for utilization during fiscal 2000
(in consideration of the annual limitations) are $83,048. Additional net
operating losses created prior to the changes in control of $2,574 become
available in each subsequent year and accumulate if not used until such net
operating losses expire.
Due to the uncertainty surrounding the timing of realizing the benefits
of our favorable tax attributes in future tax returns, we have placed a full
valuation allowance against our net deferred tax asset. Accordingly, no deferred
tax benefit has been recorded for the years ended July 31, 1997, 1998 and 1999.
Discontinued operation
In November 1995, VTEL's wholly-owned subsidiary, CLI, adopted a plan
to discontinue operation of its broadcast products division and focus its
efforts and resources in developing and marketing videoconferencing products. In
June 1996, CLI completed the sale of certain assets of its broadcast products
division. During the year ended July 31, 1997, CLI revised the amount of loss
associated with disposing of the broadcast products division and recorded an
additional charge of $7.8 million, primarily due to additional at-risk
receivables that were subsequently identified (see Note 7 to the Consolidated
Financial Statements). No activity related to discontinued operation was
recorded in either fiscal 1998 or 1999.
20
<PAGE>
Net income (loss)
VTEL generated a net loss from continuing operations of $44.3 million
for the year ended July 31, 1997. In fiscal 1998, we recorded net income from
continuing operations of $2.8 million. For the year ended July 31, 1999 we
generated a net loss of $15.6 million. The large net loss incurred for the year
ended July 31, 1997 was due substantially to charges of $29.4 million taken
related to the Merger (see Note 1 to the Consolidated Financial Statements). We
generated net income during fiscal 1998 as a result of a reduction of operating
expenses which was greater than the decline in revenues and several nonrecurring
events. Additionally, we generated income of approximately $1.3 million (net of
expenses) from a planned non-recurring real estate transaction which eliminated
duplicate corporate headquarter facilities. Due to the favorable resolution of
certain Merger-related issues during the year ended July 31, 1998, we were able
to record a net credit to income of approximately $1.5 million due to the
reversal of certain Merger and other accruals that were recorded as of July 31,
1997.
The loss generated during fiscal 1999 was the result of lower revenues
due to a decline in the demand for large group video conferencing systems. Since
expense levels are based to a large extent on revenue expectations we
experienced significant losses during the first and second quarters of the year
after which we were able to complete its restructuring (see "Restructuring
Activities") and align more closely its expense levels with projected revenue.
Other factors affecting results of operations
VTEL's future results of operations and financial condition could be
impacted by the following factors, among others: trends in the videoconferencing
market segment, introduction of new products by competitors, increased
competition due to the entrance of other companies into the videoconferencing
market segment especially more established companies with greater resources than
ours, delay in the introduction of higher performance products, market
acceptance of new products introduced by VTEL, price competition, interruption
of the supply of low-cost products from third-party manufacturers, changes in
general economic conditions in any of the countries in which we do business,
adverse legal disputes and delays in purchases relating to federal government
procurement.
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, our past earnings
and stock price have been, and future earnings and stock price potentially may
be, subject to significant volatility, particularly on a quarterly basis. Past
financial performance should not be considered a reliable indicator of future
performance and investors are cautioned in using historical trends to anticipate
results or trends in future periods. Any shortfall in revenue or earnings from
the levels anticipated by securities analysts could have an immediate and
significant effect on the trading price of VTEL's Common Stock in any given
period. Also, we participate in a highly dynamic industry which often
contributes to the volatility of VTEL's Common Stock price.
On October 1, 1999, VTEL filed Form 8-K in which we restated our
Consolidated Statement of Operations for the quarters ended October 31, 1998,
January 31, 1999 and April 30, 1999. The restatements are attributed to non-cash
adjustments made to certain depreciation and amortization accounts, inventory
accounts, and to the reversal of final acceptance revenues for certain Chinese
orders in which final cash payment has not yet been received. The unaudited
quarterly financial results are included in Note 15 of the accompanying
Consolidated Financial Statements.
21
<PAGE>
Further, this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that relate to future results or events and are based on our current
expectations. There are many factors that affect our business and results of
operations, all of which involve risks and uncertainties that could cause actual
results to differ materially from those reflected in those forward-looking
statements, including the risks discussed above and elsewhere herein.
Liquidity and capital resources
At July 31, 1999, we had working capital of $28.1 million, including
$12.1 million in cash, cash equivalents and short-term investments. Cash used by
operating activities was $15.2 million for the year ended July 31, 1997. Cash
provided by operating activities was $19.8 million for the year ended July 31,
1998. Cash used by operating activities was $10.7 million for the year ended
July 31, 1999. Changes in cash from operating activities are primarily the
result of the net losses or income generated and changes in working capital,
primarily increases and decreases in accounts receivable, inventories and
accounts payable.
Cash provided by investing activities was $23.3 million for the year
ended July 31, 1997 as compared to cash used in investing activities of $10.6
million for the year ended July 31, 1998. During fiscal 1997, cash provided by
investing activities was primarily due to the net sale of investments to finance
our operations during the period, which included large cash requirements
associated with the Merger. During fiscal 1998 cash used in investing activities
was primarily the result of expenditures related to leasehold improvements in
Austin and Sunnyvale, the implementation of its Enterprise Resource Planning
System, our transaction processing and financial accounting system, and
purchases of equipment. During fiscal 1999, we used $4.6 million in investing
activities that were spent primarily to complete the acquisition of property and
equipment and capitalize the costs associated with the research and development
of our next generation of visual communication products. These were partially
offset by the net sale and maturity of short-term investments.
Cash used by financing activities was $5.1 million for the year ended
July, 31 1997 as compared to cash provided by financing activities of $1.5
million for the year ended July 31, 1998 and cash provided by financing
activities of $8.0 million for the year ended July 31, 1999. Cash used in
financing activities during fiscal 1997 was primarily the result of the purchase
of treasury stock by VTEL and the repayment of debt by our wholly-owned
subsidiary, CLI, offset by the sale of preferred stock by CLI during the year
ended July 31, 1997. Cash provided by financing activities for the year ended
July 31, 1998 relates to the issuance of stock under VTEL's stock option and
stock purchase plans (see Note 10 to our Consolidated Financial Statements).
Cash provided by financing activities for the year ended July 31, 1999 relate to
borrowing under our line of credit and is offset by the purchase of treasury
stock and payments on notes payable.
During fiscal 1997, we purchased 455,200 shares of our Common Stock for
approximately $3.7 million. All of the repurchased shares were reissued during
fiscal 1997 to fulfill requirements for VTEL's Common Stock. In February 1997,
we terminated the stock repurchase program. During fiscal 1999 we initiated a
new stock repurchase program and repurchased 526,000 shares of our Common Stock
for $2.3 million. The repurchased shares have been used to fulfill requirements
for VTEL's stock including stock option exercises or stock issuances under
business combination transactions. No additional share repurchases are currently
planned, although we are authorized to repurchase up to 1,474,000 additional
shares.
VTEL has a $20.0 million revolving line of credit with a banking syndi-
cate. We have issued a letter of credit totaling $1.2 million under our
revolving line of credit as a lease deposit on one of our facilities. At July
31, 1999 we have drawn $11.2 million under the syndicated line of credit. The
line of credit is subject to loan covenants that require the maintenance of
certain financial ratios. In the event we are unable to maintain these ratios in
the future; additional advances under the line of credit may not be available.
VTEL's principal sources of liquidity at July 31, 1999 consist of $12.1
million of cash, cash equivalents and short-term investments, amounts available
under our revolving line of credit and the ability to generate cash from
operations.
22
<PAGE>
Legal Matters
VTEL is the defendant or plaintiff in various actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
Our wholly owned subsidiary, CLI, was previously involved in a legal
dispute with Philips Electronics North America Corporation ("Philips"). On May
25, 1999, we announced a compromise settlement agreement between Philips and
CLI. The settlement agreement, valued at less than $900,000 stipulates payment
by CLI in the form of cash and a future payment under a note for $250,000 (see
Note 8 in the Consolidated Financial Statements), as well as warrants for VTEL
common stock. These amounts had previously been accrued as part of the reserve
for contingent liabilities related to the merger (See Note 1 in the Consolidated
Financial Statements). In addition, the settlement mutually releases each party
from all future claims, demands and causes of action.
Impact of Year 2000
Many computer systems may experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the Year 2000 in order to remain functional. Prior to April
1999, we believed that our products were Year 2000 compliant with minor
exceptions due to the incorporation of third party software such as Microsoft
Windows(TM) which is Year 2000 compliant with minor exceptions. In April 1999,
Microsoft announced that upgrades would be made available that will make
Microsoft Windows(TM) Year 2000 compliant. The ability to make Windows(TM)
compliant favorably affects VTEL customers who are using older video
conferencing systems that run on Windows 95, 98 and NT(TM) software. We believe
that all our products being shipped are Year 2000 compliant. Additionally,
previous shipments of our current products can be made Year 2000 compliant
through software patches or upgrades. While we are not currently aware of any
other Year 2000 compliance issues with our products, no assurances can be made
that problems will not arise such as customer problems with other software
programs, operating systems or hardware that disrupt their use of their
products. There can be no assurances that such disruption would not negatively
impact costs and revenues in future years.
The Enterprise Resource Planning System was acquired in 1998. We have
been assured by the vendor of our Enterprise Resource Planning System that the
system is Year 2000 compliant. On August 1, 1999, the system began processing
transactions in our fiscal year 2000. We began assessing Year 2000 issues and
Year 2000 testing of other management information systems during fiscal 1998.
We presently believe that with modifications to existing software
and conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
Year 2000 activities will be a continuation of the on-going process to improve
all of our systems. We have estimated the total costs of Year 2000 compliance
and related contingency planning to be $200,000. We have not accrued any amounts
related to the expected costs as we intend to expense Year 2000 costs as they
are incurred. We have plans to complete our internal risk assessment of Year
2000 issues and expect to complete our review of significant vendors and key
business partners by November 15, 1999. Through the implementation of our Year
2000 compliant Enterprise Resource Planning Software and review of all computer
hardware on our premises we are optimistic about our ability to continue to be
able to conduct business on January 1, 2000. However, other factors that are
beyond our control could potentially have a material effect on future financial
results. Specific factors that might cause a material impact include, but are
not limited to, electrical power outages that would disrupt operations, failure
by third parties to timely convert their systems, and similar uncertainties. In
addition, Year 2000 issues may impact our customer's ability to purchase
products and therefore materially impact our future revenue stream. To the
extent these potential revenue reductions cannot be anticipated and/or we cannot
reduce operating expenses correspondingly, then we may experience severe
unfavorable financial impact to our net income. We have asked our employees to
be available during the transition period into 2000 as an additional measure to
address any unexpected Year 2000 issues.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. We are required
to adopt this standard in the first quarter of fiscal 2001. We expect that the
adoption of SFAS No. 133 will not have a material impact on our financial
position or our results of operations.
23
<PAGE>
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SoP) No. 98-5, "Reporting on the Costs of Start-up
Activities", which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The SoP is effective for VTEL on
August 1, 1999. We estimate that the effect of adopting the SoP to be
approximately $0.1 million which will be recorded as a cumulative change in
accounting principle as reported in the results of operations during the first
quarter of fiscal 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We identify our principal market risks as foreign currency exchange
rate fluctuations and interest rate risk related to long-term debt obligations.
Foreign currency exchange rate fluctuations are mostly related to the settlement
of net intercompany receivables due from our foreign subsidiaries. The amount of
risk is mitigated by the practice of requiring where possible the repayment of
such receivables in U.S. currency. In the normal course of business, we employ
established policies and procedures to manage these risks. We use proceeds from
debt obligations to support general corporate purposes including capital
expenditures and working capital needs. Interest rate exposure is related to
borrowings under the $20 million revolving line of credit facility. Interest
rate exposure with regard to our investments is minor due to the short term
nature of our maturities.
Foreign Exchange Risk
Our objective in managing our exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, we utilize forward contracts to hedge our foreign currency exposure
on firm commitments. The principal currencies hedged during fiscal year 1999
were the German mark, the Euro and Australian dollar. We monitor our foreign
currency exchange exposures to ensure the overall effectiveness of our foreign
currency hedge positions. However, there can be no assurance our foreign
currency hedging activities will offset the impact of substantial fluctuations
in currency exchange rates on our results of operations and financial position.
The following are summarized market risks of forward contracts at July 31, 1999
by foreign currencies in which we do business:
<TABLE>
<CAPTION>
(Thousands except contract rates) Notional Average Unrealized
Settlement Contract Gain
Functional Currency Amount Rate (Loss)
- ------------------------------- ----------------- -------------- -------------
<S> <C> <C> <C>
Euros $ 2,261 1.07 $ (19)
Australian Dollars 452 0.65 1
------- ---- -----
$ 2,713 $ (18)
======= =====
* * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants 26
Financial Statements:
Consolidated Balance Sheet as of July 31, 1998 and 1999 27
Consolidated Statement of Operations for the years ended
July 31, 1997, 1998 and 1999 28
Consolidated Statement of Changes in Stockholders' Equity for the
years ended July 31, 1997, 1998 and 1999 29
Consolidated Statement of Cash Flows the years ended July 31, 1997, 1998 and 1999 30
Notes to Consolidated Financial Statements 31
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 56
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise
included
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of VTEL Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of VTEL Corporation and its subsidiaries at July 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended July 31, 1999 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index, presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these consolidated financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
September 24, 1999
26
<PAGE>
VTEL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share data)
- -----------------------------------------------------------------------------------------------------------
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 15,191 $ 7,805
Short-term investments 14,484 4,308
Accounts receivable, net of allowance for doubtful
accounts of $9,447 and $1,223 at
July 31, 1998 and July 31, 1999 40,527 38,291
Inventories 12,951 15,553
Prepaid expenses and other current assets 2,533 2,320
-------- --------
Total current assets 85,686 68,277
Property and equipment, net 28,106 29,704
Intangible assets, net 11,812 15,841
Capitalized software 984 7,351
Other assets 2,701 2,918
-------- --------
$129,289 $124,091
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,600 $ 18,375
Accrued merger and other expenses 1,741 -
Accrued compensation and benefits 5,258 4,916
Other accrued liabilities 2,791 3,555
Notes payable, current portion 2,234
Deferred revenue 11,793 11,062
-------- --------
Total current liabilities 44,183 40,142
Long-term liabilities:
Borrowings under line of credit - 11,200
Notes payable - 554
Other long-term obligations 3,848 4,176
-------- --------
Total long-term liabilities 3,848 15,930
27
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13) - -
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
authorized; none issued or outstanding - -
Common stock, $.01 par value; 40,000,000 authorized;
23,227,000 and 24,423,000 issued at July 31, 1998
and July 31, 1999 232 244
Additional paid-in capital 256,594 260,057
Accumulated deficit (175,455) (191,665)
Unearned compensation (76) (385)
Stock subscriptions receivable - (150)
Accumulated other comprehensive loss (37) (82)
-------- --------
Total stockholders' equity 81,258 68,019
-------- --------
$129,289 $124,091
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
28
<PAGE>
VTEL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
FOR THE
YEARS ENDED JULY 31,
1997 1998 1999
<S> <C> <C> <C>
REVENUES:
Products $ 150,791 $ 134,775 $ 105,520
Services and other 40,232 44,909 46,082
----------------- ---------------- ----------------
Total revenues 191,023 179,684 151,602
----------------- ---------------- ----------------
COST OF SALES:
Products 87,231 65,811 55,167
Services and other 29,090 28,916 29,197
----------------- ---------------- ----------------
Total cost of sales 116,321 94,727 84,364
----------------- ---------------- ----------------
Gross margin 74,702 84,957 67,238
----------------- ---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 65,399 64,802 60,855
Research and development 24,460 19,892 17,951
Merger and other 29,397 (1,536) (235)
Amortization of intangible assets 960 960 1,271
Restructuring expense - - 3,080
----------------- ---------------- ----------------
Total operating expenses 120,216 84,118 82,922
----------------- ---------------- ----------------
Income (loss) from operations (45,514) 839 (15,684)
----------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 2,736 1,242 792
Interest expense and other (1,505) 735 (723)
----------------- ---------------- ----------------
1,231 1,977 69
----------------- ---------------- ----------------
Net income (loss) before provision
for income taxes (44,283) 2,816 (15,615)
Benefit (provision) for income taxes 12 (37) 50
----------------- ---------------- ----------------
Net income (loss) from continuing operations (44,271) 2,779 (15,565)
----------------- ---------------- ----------------
DISCONTINUED OPERATION:
Net loss from discontinued operation (7,783) - -
----------------- ---------------- ----------------
Net income (loss) $ (52,054) $ 2,779 $ (15,565)
================= ================ ================
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net income (loss) from continuing operations $ (44,271) $ 2,779 $ (15,565)
Deemed preferred stock dividend related to
conversion discount (2,527) - -
----------------- ---------------- ----------------
Adjusted net income (loss) from continuing operations (46,798) 2,779 (15,565)
Net income (loss) from discontinued operation (7,783) - -
----------------- ---------------- ----------------
Net income (loss) applicable to common stock $ (54,581) $ 2,779 $ (15,565)
================= ================ ================
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (2.10) $ 0.12 $ (0.66)
Income (loss) from discontinued operation (0.35) - -
----------------- ---------------- ----------------
Net income (loss) per share $ (2.45) $ 0.12 $ (0.66)
================= ================ ================
Weighted average shares outstanding:
Basic 22,255 23,057 23,509
================= ================ ================
Diluted 22,255 23,458 23,509
================= ================ ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
29
<PAGE>
VTEL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
---------------------------
NUMBER OF PAID-IN OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT OTHER INCOME (LOSS) EQUITY
------------- ------------- -------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 21,498 $ 215 $ 245,585 $ (123,713) $ - $ 151 $ 122,238
Proceeds from sale of
stock 1,258 13 7,703 - - - 7,716
Proceeds from stock
issued under employee
plans 572 1 2,503 - - - 2,504
Purchase and issuance
of treasury stock (455) - (1,275) (2,467) - - (3,742)
Unearned compensation - - 364 - (364) -
Amortization of
unearned compensation - - - - 249 - 249
Net loss - - - (52,054) -
Foreign currency
translation adjustment - - - - - (146)
Comprehensive loss (52,200)
------------- ------------- -------------- ------------- ------------- ------------ --------------
BALANCE AT JULY 31, 1997 22,873 229 254,880 (178,234) (115) 5 76,765
Proceeds from stock
issued under employee
plans 344 3 1,473 - - - 1,476
Common stock issued
for acquisition 10 - 153 - - - 153
Unearned compensation - - 88 - (88) -
Amortization of
unearned compensation - - - - 127 - 127
Net income - - - 2,779 - -
Foreign currency
translation adjustment - - - - - (42)
Comprehensive income 2,737
------------- ------------- -------------- ------------- ------------- ------------ --------------
BALANCE AT JULY 31, 1998 23,227 232 256,594 (175,455) (76) (37) 81,258
Proceeds from stock
issued under
employee plans 47 1 103 - - - 104
Purchase of treasury
stock (526) - (2,265) - - - (2,265)
Issuance of treasury
stock under employee
plans 357 - 1,438 (645) - - 793
Treasury stock issued for
acquisition 169 - 826 - - - 826
Common stock issued for
acquisitions 1,149 11 2,596 - - - 2,607
Warrants issued in legal
settlement [Note 13] - - 52 - - - 52
Stock subscriptions
receivable - - 150 - (150) - -
Unearned compensation - - 563 - (563) - -
Amortization of unearned
compensation - - - - 254 - 254
Net loss - - - (15,565) - -
Foreign currency
translation adjustment - - - - - (45)
Comprehensive loss (15,610)
BALANCE AT JULY 31, 1999 24,423 $ 244 $ 260,057 $ (191,665) $ (535) $ (82) $ 68,019
============= ============= ============== ============= ============= ============ ==============
</TABLE>
The accompanying notes are an
integral part
of these consolidated financial statements.
30
<PAGE>
VTEL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (52,054) $ 2,779 $ (15,565)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Depreciation and amortization 12,667 8,870 11,797
Provision for doubtful accounts and returns 4,145 (119) 436
Amortization of unearned compensation 249 127 254
Gain on sale of fixed assets - - (132)
Foreign currency translation gain (loss) (3) 112 88
Decrease in accounts receivable 106 3,299 2,206
(Increase) decrease in inventories 7,064 10,758 (1,294)
(Increase) decrease in prepaid expenses and other
current assets (492) 358 220
Increase (decrease) in accounts payable 5,005 (3,099) (5,539)
Increase (decrease) in accrued expenses 6,535 (5,505) (2,967)
(Decrease) in research and development advance (5) - -
Increase (decrease) in deferred revenues 2,195 2,172 (178)
Decrease in accrued expenses, discontinued operation (657) - -
Net cash provided by (used in) operating activities ------------- ------------- --------------
(15,245) 19,752 (10,674)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (391,628) (247,223) (150,828)
Sales and maturities of short-term investments 419,636 253,038 161,004
Purchases of property and equipment (18,781) (15,835) (8,778)
Sales of property and equipment 11,208 260 1,441
Cash paid for acquired assets (Note 3) - - (231)
Issuance of notes receivable - - (750)
(Increase) decrease in capitalized software 3,561 (984) (6,367)
(Increase) decrease in other assets (745) 104 (67)
Net cash provided by (used in) investing activities ------------- ------------- --------------
23,251 (10,640) (4,576)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 8,044 1,476 104
Purchase of treasury stock (3,742) - (2,265)
Proceeds from the sale of treasury stock 1,275 - 793
Borrowings under line of credit agreements - - 11,200
Payments on notes payable - - (1,835)
Repayment of short-term debt (10,656) - -
Net cash provided by (used in) financing activities ------------- ------------- --------------
(5,079) 1,476 7,997
Effect of translation exchange rates on cash (143) (154) (133)
------------- ------------- ---------------
Net increase (decrease) in cash and equivalents 2,784 10,434 (7,386)
Cash and equivalents at beginning of period 1,973 4,757 15,191
------------- ------------- ---------------
Cash and equivalents at end of period $ 4,757 $ 15,191 $ 7,805
============= ============= ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,582 $ - $ 775
Non-cash transactions
Stock issued for acquired assets (Note 3) - 153 3,433
Notes payable issued for acquired asset - 837 4,373
Issuance of stock warrants and note in legal settlement (Note 13) - - 302
Issuance of restricted stock to employees (Note 10) - - 563
Stock issued in lieu of repayment of research and development
advance 901 - -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
31
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
1. THE COMPANY
VTEL Corporation ("VTEL" or the "Company") designs, manufactures,
markets, services and supports integrated, multi-media visual communication
systems which operate over private and switched digital communication networks.
VTEL distributes its systems to a domestic and international marketplace through
a reseller network and directly to end-user customers.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger")
of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct
wholly-owned subsidiary of VTEL.
The acquisition was accounted for as a pooling of interests and
accordingly, the consolidated financial statements have been restated for the
period ended July 31, 1997 to include the accounts of CLI. Revenues, net income
(loss) from continuing operations and net income (loss) of the separate
companies for the 1997 period were as follows:
<TABLE>
<CAPTION>
VTEL CLI TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
YEAR ENDED JULY 31, 1997 *
Revenues $124,438 $ 66,585 $191,023
Net loss from continuing operations ** 556 (44,827) (44,271)
Net loss (508) (51,546) (52,054)
<FN>
* Information for CLI is through the date of the Merger, May 23, 1997.
** Includes loss of $29,397 related to the merger.
</FN>
</TABLE>
In connection with the Merger, the Company recorded merger and other
expenses of $29,397 during the year ended July 31, 1997 as follows:
TRANSACTION EXPENSES:
Investment banking fees $ 2,391
Legal and accounting fees 1,600
Other 1,663
----------
5,654
----------
RESTRUCTURING AND OTHER:
Asset impairments 12,469
Reserve for contingent liabilities 5,271
Severance and termination benefits 3,457
Other 2,546
----------
23,743
----------
Total $ 29,397
==========
In connection with the Merger in 1997, the Company made the decision to
discontinue the CLI product-line and made the transition to a single product
platform, VTEL's Enterprise Series Architecture (ESA) platform. The Company also
made the decision to reduce duplicate operating functions, which resulted in a
reduction in the workforce of CLI. These activities resulted in the obsolescence
of all of the remaining CLI inventory related to the discontinued products and
the impairment of excess and unproductive assets resulting from the merger
transition plan. Asset impairment was determined by estimating the lower of the
asset's carrying amount or fair value less cost to sell.
32
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The restructuring activities related to the Merger involved the
involuntary termination of approximately 150 employees over the period from May
23, 1997 (the date of the Merger) to November 30, 1997.
The major components of the asset impairment recorded at July 31, 1997
are as follows:
Write-down of recorded value of discontinued CLI inventory
due to discontinuance of the CLI product line $ 3,500
Write-off of capitalized software development costs due to 3,200
discontinuance of the CLI product line
Write-off of purchased software deemed redundant as a 1,300
result of the Merger
Write-off of unproductive CLI assets (primarily furniture, 2,800
fixtures, equipment and leasehold improvements) due to
workforce reduction subsequent to the Merger
Reserve for uncollectible receivables related to sales of 1,669
products which were subsequently discontinued and no
longer supported
----------
Total $ 12,469
==========
Contingent liabilities of $5.2 million accrued at July 31, 1997 reflect
amounts accrued for the discharge of pending and threatened litigation against
the Company's wholly-owned subsidiary, CLI, and amounts accrued to discharge
known and probable vendor disputes related to CLI. These amounts include
management's estimate of the probably costs expected to be incurred to settle,
discharge or litigate the matters.
Other restructuring charges of $2.5 million include $1.6 million
related to the cancellation of purchase commitments that had no future economic
benefit to the discontinued CLI product-line and costs associated with the
closure of redundant facilities.
Changes to accrued merger and other and the reserve for asset
impairments during the year ended July 31, 1999 were as follows:
<TABLE>
<CAPTION>
BALANCE AT PAID IN DISPOSALS REVERSED BALANCE AT
JULY 31, FISCAL IN FISCAL IN FISCAL JULY 31,
1998 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C>
ASSET IMPAIRMENTS $ 382 $ - $ 382 $ - $ -
============ =========== ============ ============ ============
ACCRUED MERGER AND
OTHER EXPENSES:
Reserve for
contingent liabilities $ 1,484 $ 1,249 $ - $ 235* $ -
Severance and
termination benefits 257 257 - - -
------------ ----------- ------------ ------------ ------------
$ 1,741 $ 1,506 $ - $ 235 $ -
============ =========== ============ ============ ============
<FN>
* During the fiscal year ended July 31, 1999, the remaining litigation claims
involving CLI were either dismissed in court or settled with the plaintiff. The remaining
reserves for contingent liabilities were credited to income.
</FN>
</TABLE>
33
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of VTEL's
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Preparation of the 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 disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates made by management include the provision for doubtful accounts
receivable, inventory write-downs for potentially excess or obsolete inventory,
warranty reserves, the valuation allowance for the gross deferred tax asset,
contingency reserves, lives of fixed assets and the amortization period for
intangible assets. Actual amounts could differ from the estimates made.
Management periodically evaluates estimates used in the preparation of the
financial statements for continued reasonableness. Appropriate adjustments, if
any, to the estimates used are made prospectively based upon such periodic
evaluation.
Revenue Recognition
Product revenues, recorded net of discounts, are recognized at the time
a product is shipped or services are performed and the Company has no
significant further obligations to the customer. Customer prepayments are
deferred until product shipment has occurred or services have been rendered and
there are no significant further obligations to the customer. Service revenues
are recognized at the time the services are rendered and the Company has no
significant further obligations to the customer. Revenues for extended warranty
contracts are recorded over the contract period. The Company records an
allowance to reduce sales revenue by an amount which reflects management's
estimate of potential future sales returns, exchanges, customer stock rotations
or price protection discounts.
Warranty Costs
The Company generally warrants its products against hardware defects
for one year from the date of installation but not to exceed fifteen months from
date of shipment. A warranty is provided for software defects for ninety days
from the date of installation. The Company provides currently for the estimated
costs which may be incurred in the future under the warranty program.
Software Development Costs
Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Amortization of capitalized software begins upon initial product shipment.
34
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Software development costs are amortized (a) over the estimated life of the
related product (generally thirty months), using the straight-line method or (b)
based on the ratio of current revenues from the related products to total
estimated revenues for such products, whichever is greater.
The Company capitalized internal software development costs of $1,622,
$984 and $6,367 for the years ended July 31, 1997, 1998 and 1999, respectively.
Amortization of such costs was $1,827, $50 and zero for the years ended July 31,
1997, 1998 and 1999, respectively. In connection with the Merger, the Company
recorded an impairment charge of $3,218 related to capitalized software
development costs during the year ended July 31, 1997 due to the elimination of
the product line to which the capitalized software development costs related.
Cash and Equivalents
Cash and equivalents include cash and investments in liquid money
market accounts.
Short-term Investments
Short-term investments are carried at market value, which approximates
cost, at the balance sheet date. Short-term investments consist of funds
primarily invested in mortgage-backed securities guaranteed by the U.S.
government, government securities and commercial paper. Investment securities
generally have maturities of less than one year.
The Company accounts for investment securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires investment securities to be classified as held-to-maturity, trading or
available-for-sale based on the characteristics of the securities and the
activity in the investment portfolio. At July 31, 1998 and 1999, all investment
securities are classified as available-for-sale. No unrealized gains or losses
have been recorded as a separate component of equity for the current period or
prior year as market values approximate cost due to the short-term nature of the
investments.
Inventories
Inventories are stated at the lower of cost (weighted average cost
which approximates the first-in, first-out method) or market. Cost includes the
acquisition of purchased components, parts and sub-assemblies, labor and
overhead.
Property and Equipment
Property and equipment is recorded at cost. Internal support equipment
is video teleconferencing equipment used internally for purposes such as sales
and marketing demonstrations, Company meetings, testing, troubleshooting
customer problems, and engineering, and is recorded at manufactured cost.
Depreciation and amortization are provided using the straight-line method over
the estimated economic lives of the assets, ranging from two to ten years, or
over the lease term or life of the improvement of the respective assets, as
applicable. Repair and maintenance costs are expensed as incurred. The Company
periodically reviews the estimated economic lives of property and equipment and
will make adjustments according to the latest information available.
In accordance with Statement of Position ("SoP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for internal Use," the
Company capitalized $0.8 million of internal costs associated with the
implementation of the Oracle Enterprise Resource Planning Software System, the
Company's management resource planning, transaction processing and financial
accounting system, during the year ended July 31, 1998.
35
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets include the goodwill that results from various
acquisitions of the Company (see Note 3) as well as other intangibles, including
acquired technology. Goodwill is associated with the acquisition of the
Company's Global Services unit, Vosaic and its subsidiaries in France and
Germany. Amortization periods for the intangibles associated with these
acquisitions range from 3 to 15 years. In accordance with Accounting Principles
Board Opinion ("APB") No. 17, "Intangible Assets," the Company periodically
evaluates the amortization period associated with the acquired intangible assets
based upon anticipated periods of future benefit. The Company evaluates factors
such as loss of employees with key or unique skills, the Company's ability to
continue to successfully utilize the specialized knowledge acquired and other
relevant factors which could require revision of the estimate of the
amortization period. Appropriate adjustments, if any, to the amortization period
will be made prospectively based upon such periodic evaluation. Accumulated
amortization of intangibles was $2,554 and $3,817 at July 31, 1998 and 1999.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Accordingly,
assets and liabilities of the subsidiaries are translated at current rates of
exchange at the balance sheet date. The resultant gains or losses from
translation are included in a separate component of stockholders' equity. Income
and expense from the subsidiaries are translated using monthly average exchange
rates.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes," which requires the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Net Income (Loss) Per Share
The Company reports earnings per share under SFAS No. 128, "Earnings
Per Share." Under SFAS No. 128, basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is calculated
by dividing net income available to common stockholders by the weighted average
shares of common stock outstanding during the period. Diluted earnings per share
is calculated by dividing net income available to common stockholders by the
weighted average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive shares outstanding. All historical
earnings per share data have been restated to conform to the current year
presentation.
The calculation of the number of weighted average shares outstanding
for basic and dilutive earnings (loss) per share for each of the periods
presented is as follows:
FOR THE YEARS ENDED
JULY 31,
1997 1998 1999
Weighted average shares
Outstanding - basic 22,255 23,057 23,509
------- ------- -------
Effect of Dilutive Securities:
Stock options - 400 -
Warrants to purchase common stock - 1 -
------- ------- -------
Dilutive potential common shares - 401 -
------- ------- -------
Weighted average shares
outstanding - diluted 22,255 23,458 23,509
======= ======= =======
Antidilutive securities 3,648 1,764 4,457
======= ======= =======
36
<PAGE>
Net loss applicable to common stock for the year ended July 31, 1997 is
computed by increasing the net loss from continuing operations by $2,527 which
represents a deemed dividend related to the 20% conversion discount on Series C
Preferred Stock measured at the date of original issuance.
Concentration of Credit Risk
The Company sells its products to various companies across several
industries, including third-party resellers. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
The Company requires advanced payments or secured transactions when deemed
necessary.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including
cash and equivalents, short-term investments and short-term trade receivables,
payables, and debt, approximates fair value. The fair value of the Company's
foreign currency forward contracts is determined at July 31, 1998 and 1999 based
on quoted market rates. The carrying amount of short-term investments
approximates fair value because of the short maturity and nature of these
instruments. The Company places its cash in investment quality financial
instruments and limits the amount invested in any one institution or in any type
of instrument. The Company has not experienced any significant losses on its
investments.
Long-lived Assets
The Company evaluates its long-lived assets and intangibles based on
guidance provided by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of. The Company believes no impairment exists at July 31, 1999.
Employee Stock Plans
The Company determines the fair value of grants of stock, stock options
and other equity instruments issued to employees in accordance with SFAS No.
123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on their estimated fair market value on the date of grant. The Company has
opted to continue to apply the existing accounting rules contained in APB No.
25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 has had no
effect on the Company's financial position or results of operations.
The Company records unearned compensation related to stock options that
are issued at exercise prices which are below the fair market value of the
underlying stock on the measurement date. Such unearned compensation is
amortized ratably over the vesting period of the related stock options.
Treasury Stock
The Company accounts for its treasury stock purchases and issuances
using the cost method.
37
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Comprehensive Income
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No.130 establishes standards for reporting
comprehensive income and its components. The Company's comprehensive income
(loss) is shown on the Company's Statement of Changes in Stockholders' Equity
and is comprised of net income (loss) and foreign currency translation
adjustments.
Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the fiscal year ended July 31, 1999.
SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information as and has been used for all years presented in these
financial statements (Note 14).
Recent Accounting Pronouncements
In June 1998, Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company is required to adopt this standard in the
first quarter of fiscal 2001. The Company expects that the adoption of SFAS No.
133 will not have a material impact on it financial position or its results of
operations.
In April 1998, American Institute of Certified Public Accountants issued
SoP No. 98-5, "Reporting on the Costs of Start-up Activities", which provides
guidance on the financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. The SoP is effective for the Company on August 1, 1999. The Company
estimates that the effect of adopting the SoP to be approximately $100 which
will be recorded as a cumulative change in accounting principle in the results
of operations during the first quarter of fiscal 2000.
3. ACQUISITIONS
The Company consummated the acquisition of certain of the assets of the
videoconferencing division of one of its German resellers effective July 1,
1998. The consideration paid by the Company consisted of restricted stock,
warrants, a note payable, and the assumption of certain payables and other
liabilities totaling approximately $1,871. During fiscal 1999, the Company
completed the acquisition of one of its French resellers primarily through the
issuance of restricted stock for approximately $826.
On March 9, 1999, the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company for $3.2 million in cash, stock and warrants. The transaction
has been accounted for as a purchase of assets. The acquisition involved the
issuance of 1,149,000 shares (equivalent to approximately 5% of the outstanding
38
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
shares of the Company's stock as of March 9, 1999). The common shares have been
registered with the Securities Exchange Commission as of May 14, 1999. Of these
shares, 200,000 are to be held in escrow and an additional, 350,000 warrants
remain unearned pending the completion of certain obligations by Vosaic LLP.
4. INVENTORIES
Inventories consist of the following:
JULY 31,
1998 1999
Raw materials $ 5,938 $ 8,595
Work-in-process 517 1,504
Finished goods 5,833 4,637
Finished goods held for
evaluation and rental agreements 663 817
------- -------
$12,951 $15,553
======= =======
Finished goods held for evaluation and under rental agreements consists
of completed visual communication systems used for demonstration and evaluation
purposes, which are generally sold during the next year.
5. PROPERTY AND EQUIPMENT
Property and equipment and related depreciable life is composed of the
following:
JULY 31,
1998 1999
Furniture, machinery and equipment, 2-10 years $ 30,045 $ 24,241
Internal support equipment, 2-4 years 12,513 9,043
Customer service assets, 4-8 years 15,263 15,520
Leasehold improvements, lease term or
life of the improvement 6,686 8,893
--------- ---------
64,507 57,697
Less accumulated depreciation (36,401) (27,993)
--------- ---------
$ 28,106 $ 29,704
========= =========
Depreciation and amortization expense relating to property and
equipment was approximately $12,991, $7,910 and $9,964 for the years ended July
31, 1997, 1998 and 1999, respectively.
39
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
6. RESTRUCTURING ACTIVITIES
In November 1998, management adopted a restructuring plan that was
intended to match the size and complexity of the organization with the planned
path of the Company. The plan included the involuntary reduction of 138
employees in fiscal 1999. Terminations were generally made in all departments,
including manufacturing, sales, management and accounting, and were effective
immediately for most employees upon announcement. The Company also made the
decision to reduce operating costs by exiting other activities and reducing
related overhead costs. These activities included the closure of certain field
sales offices and its Sunnyvale, California spare parts depot.
As a result of the restructuring, the Company recorded a charge of $3.1
million during the year ended July 31, 1999. As of July 31, 1999, substantially
all of the termination and severance benefits had been paid. The transition of
the spare parts depot in Sunnyvale was completed during 1999.
The following schedule summarizes the components and activities of the
restructuring plan:
BALANCE
RESTRUCTURING EXPENDITURES ACCRUED AT
EXPENSE INCURRED JULY 31, 1999
Termination and severance
benefits $ 2,311 $ 2,293 $ 18
Facility closure and other
(primarily non-cancelable lease
obligations) 769 769 -
-------- -------- ------
$ 3,080 $ 3,062 $ 18
======== ======== ======
7. DISCONTINUED OPERATION
On June 27, 1996, CLI completed the sale of certain assets of its
broadcast products division to another company in exchange for $12,500 in cash
and the assumption of $2,000 in liabilities. The purchaser assumed past warranty
obligations associated with the product family covered by the sale. With the
exception of the accounts receivable, CLI disposed of the remaining assets of
the division to a separate buyer. During the year ended July 31, 1997, the
Company recorded a provision for probable losses to fully reserve the remaining
accounts receivable of the discontinued operation that were considered to be
uncollectible. Such provision is reflected in the accompanying consolidated
statement of operations in the net loss from discontinued operations. No
revenues from discontinued operation were recorded during the years ended July
31, 1997, 1998 or 1999.
40
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
8. NOTES PAYABLE
Notes payable at July 31, 1999 consist of the following:
Notes payable to the vendor of the Company's
Enterprise Resource Planning System
in quarterly and annual installments
through May 2001, bearing interest at rates
ranging from 7.22% to 8.50% $ 2,538
Other 250
-----------
2,788
Less:
Current maturities (2,234)
-----------
Long-term notes payable $ 554
===========
The aggregate annual maturities of notes payable at July 31, 1999 are as
follows:
FISCAL YEAR ENDING:
2000 $ 2,234
2001 554
-----------
$ 2,788
===========
9. LINE OF CREDIT
On May 5, 1999, the Company executed a credit agreement with a banking
syndicate which established a $20,000 revolving line of credit. Under the line
of credit, the Company may borrow up to 80% of eligible accounts receivable. The
credit agreement also provides that the Company may request the issuance of
letters of credit up to a maximum of $10,000 and foreign exchange contracts up
to a maximum of $10,000. Each of the aforementioned provisions are subject to
certain limitations.
Any amounts outstanding under the credit agreement will bear interest
at the prime rate plus 0.5% (8.5 % at July 31, 1999) or, at the option of the
Company, LIBOR plus 3.25% (9.05% at July 31, 1999) The interest rates may
decline if the Company achieves consecutive profitable quarters. All such
advances and accrued interest under the credit agreement will be payable on the
maturity date of May 4, 2001. The Company pays an annual commitment fee of
0.375% on its unused line of credit.
41
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Any amounts outstanding under the credit agreement will be secured by
substantially all of the Company's assets. The credit agreement requires that
the Company maintain certain financial ratios and other covenants. The Company
has issued a letter of credit totaling $1,200 under the line of credit as a
lease deposit on one of its facilities. At July 31, 1999, the Company had drawn
$11,200 under the credit line.
10. STOCKHOLDERS' EQUITY
General
In May 1997, VTEL issued 155,040 shares of Common Stock, at the fair
market value, to Intel in lieu of repayment of the remaining $901 advance under
the Development Agreement (see Note 11) that was unused at that time.
On March 9, 1999, the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company which involved the issuance of 1,149,000. Of these shares,
200,000 are to be held in escrow and an additional 350,000 warrants remain
unearned pending the completion of certain obligations by Vosaic (see Note 3).
Share Repurchase Program
During fiscal 1997, the Company purchased 455,200 shares of its Common
Stock for approximately $3.7 million. All of the repurchased shares were
reissued during fiscal 1997 to fulfill requirements for the Company's Common
Stock. In February 1997, the Company terminated the stock repurchase program.
During fiscal 1999, the Company initiated a new stock repurchase
program and repurchased 526,000 shares of its Common Stock for $2.3 million. The
repurchased shares have been be used to fulfill requirements for the Company's
stock including stock option exercises or stock issuances under business
combination transactions. No additional share repurchases are currently planned,
although the Company is authorized to repurchase up to 1,474,000 additional
shares.
Stock Subscriptions Receivable
During fiscal 1999, the Company loaned certain employees of the Company
amounts to either purchase shares of the Company's stock on the open market,
exercise options or participate in the employee stock purchase program.
Receivables with recourse totaling $150 that are related to the exercise of
options and the participation of the employee stock purchase program have been
classified as a reduction of additional paid-in capital. Receivables with
recourse totaling $750 related to the purchase of shares on the open market have
been classified as other long-term assets.
CLI Redeemable Convertible Preferred Stock
On October 25, 1996, CLI completed a private placement of 350,000
shares of Class C Preferred Stock and stock warrants for the purchase of 375,000
shares of CLI Common Stock for approximately $7,000, before certain issuance
costs, pursuant to a purchase agreement with an institutional investor. The
preferred stock was exchanged for 1,102,500 shares of VTEL Common Stock and both
the number and exercise price of the warrants were converted into warrants for
the purchase of VTEL Common Stock based on the exchange ratio of 0.46 in
connection with the Merger. The converted warrants, totaling 172,500 VTEL
shares, have an exercise price of $12.39 and expire in October 2001.
Stock and Stock Option Plans
VTEL has three stock option plans, the 1989 Stock Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director
Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan both
provide for the issuance of non-qualified and incentive stock options to
employees and consultants of the Company. Stock options are generally granted at
42
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
the fair market value at the time of grant, and the options generally vest
ratably over 48 months and are generally exercisable for a period of ten years
beginning with date of grant. The 1992 Plan provides for the issuance of stock
options to nonemployee directors at the fair market value at the time of grant.
Effective June 1999, the 1989 Plan expired whereby the company can no longer
grant options under the Plan, however, options previously granted remain
outstanding. Such options vest ratably over 36 months and are exercisable for a
period of ten years beginning with the date of the grant.
CLI had employee and director stock option plans prior to the merger
with VTEL. On May 23, 1997, all options outstanding under these plans were
converted into options for Common Stock of VTEL. Both the number of shares
subject to option and the per share exercise price under each option were
adjusted by the exchange ratio of 0.46.
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost is
recognized for its stock option plans unless options are issued at exercise
prices which are below the market price on the measurement date. Had
compensation cost for the Company's stock option plans been determined based on
the fair market value at the grant dates for awards under those plans consistent
with the method provided by SFAS No. 123, the Company's net loss and net loss
per share would have been reflected by the following pro forma amounts for the
years ended July 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (52,054) $ 2,779 $ (15,565)
Pro forma $ (55,276) $(1,589) $ (20,023)
Basic and diluted net income (loss) per
common share As reported $ (2.45) $ 0.12 $ (0.66)
Pro forma $ (2.60) $ (0.07) $ (0.85)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants the years ended July 31, 1997, 1998 and 1999:
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
Dividend yield - - -
Expected volatility 92.31% 63.12% 67.67%
Risk-free rate of return 5.90% 5.52% 6.14%
Expected life 5.12 years 5.65 years 6.26 years
43
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The following table summarizes activity under all Plans for the years
ended July 31, 1997, 1998 and 1999. This information includes stock options
relating to CLI's stock option plans. Both the number of shares and the per
share exercise price have been adjusted by the exchange ratio of 0.46.
<TABLE>
<CAPTION>
1997 1998 1999
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
Beginning of the year 2,187 $ 9.40 3,648 $9.42 3,938 $8.65
Converted from CLI 1,798 17.43 - - - -
Granted 2,098 6.44 896 6.43 1,818 3.40
Exercised (324) 3.14 (186) 4.00 (134) 2.34
Canceled (2,111) 14.58 (420) 7.55 (1,074) 7.05
------ ----- ------
Outstanding at the
end of the year 3,648 $ 9.42 3,938 $8.65 4,548 $7.11
====== ===== ======
Options exercisable at
Year end 3,402 $ 9.20 3,710 $8.42 4,457 $7.04
====== ===== ======
Weighted average
fair value of
options granted
During the year $ 3.42 $4.12 $2.48
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES JULY 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE JULY 31, 1999 EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
$ 0.30 - $ 2.94 860,353 8.47 years $ 2.43 860,353 $ 2.43
3.00 - 4.88 787,302 8.51 3.93 787,302 3.93
4.91 - 6.11 474,561 8.80 5.56 471,227 5.56
6.13 - 6.13 1,122,153 7.88 6.13 1,115,485 6.13
6.19 - 42.66 1,303,665 5.97 13.53 1,222,399 13.70
-------------------- ----------- ----------
$ 0.30 - $ 42.66 4,548,034 7.65 years $ 7.11 4,456,766 $ 7.04
==================== =========== ==========
</TABLE>
Generally, options are exercisable immediately upon grant. However,
stock issued upon exercise of a stock option is subject to repurchase by the
Company at the exercise price until the option vesting period has elapsed. At
July 31, 1999, options to purchase 2,140,615 shares were vested. At July 31,
1999, 30,540 unvested options had been exercised.
Employee Stock Purchase Plan
On April 29, 1993, VTEL adopted an Employee Stock Purchase Plan
("Employee Plan") which enables all employees to acquire VTEL stock under the
plan. The Employee Plan authorizes the issuance of up to 950,000 shares of
VTEL's Common Stock. The Employee Plan allows participants to purchase shares of
the Company's Common Stock at a price equal to the lesser of (a) 85% of the fair
market value of the Common Stock on the date of the grant of the option or (b)
85% of the fair market value of the Common Stock at the time of exercise. Common
Stock issued under the Employee Plan totaled 105,549 shares, 158,073 shares and
203,118 shares respectively, for the years ended July 31, 1997, 1998 and 1999.
44
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions for the years ended July
31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1998 JULY 31, 1999
SECTION 16 SECTION 16 SECTION 16
OFFICERS OTHERS OFFICERS OTHERS OFFICERS OTHERS
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend yield - - - - - -
Expected volatility 82.89% 79.83% 52.10% 51.68% 72.43% 71.00%
Risk-free rate of return 5.31% 5.23% 5.40% 5.34% 5.13% 4.99%
Expected life (in years) .50 .25 .50 .25 .50 .25
Weighted-average fair value
of Purchase rights granted $2.54 $2.11 $ 1.96 $ 1.66 $ 1.46 $ 1.12
</TABLE>
Restricted Stock Plan
On December 17, 1998, the Company adopted a restricted stock plan (the
"1998 Plan"). The 1998 Plan authorizes the issuance of up to 1,000,000 shares of
VTEL's Common Stock.to be used to reward, incent and retain its employees.
Shares of restricted stock issued under the 1998 Plan were 80,000 for the year
ended July 31, 1999.
11. DEVELOPMENT AND LICENSE AGREEMENT
On October 22, 1993, VTEL entered into a Development and License
Agreement (the "Development Agreement") with Intel Corporation ("Intel"),
pursuant to which the companies agreed to engage in a series of development
efforts with respect to video compression software as well as other video
technology such as processes and designs. The agreement contains certain
provisions for licensing agreements and royalties between the two companies for
the use of the technology developed under the agreement.
The initial term of the Development Agreement has renewed until
December 31, 1999 and will continue to automatically renew thereafter for
successive terms of one year unless written notice is given by either party six
months prior to the expiration of the initial term or any successor term.
VTEL was advanced $3,000 under the agreement to be used for the initial
reimbursements of research and development costs incurred by VTEL in performing
the work specified in the Development Agreement. During the year ended July 31,
1997, the Company reduced gross research and development expenses by
approximately $5 for reimbursable research and development costs under the terms
of the Development Agreement. No reductions of research and development expenses
were recorded during the years ended July 31, 1998 and 1999 as a result of the
Development Agreement. In May 1997, VTEL issued 155,040 shares of Common Stock,
at the fair market value, to Intel in lieu of repayment of the remaining $901
advance that was unused at that time. As of July 31, 1999, the Company had no
research and development activities in process or planned related to the
Development Agreement.
45
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
12. FEDERAL INCOME TAXES
Under the provisions of SFAS No. 109, the components of the net deferred
tax amount are as follows:
<TABLE>
<CAPTION>
JULY 31,
1998 1999
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 29,140 $ 38,742
Research and development credit carryforwards 3,458 4,379
Minimum tax credit carryforwards 110 110
Inventory and warranty provisions 1,246 1,921
Charitable contributions 22 40
Compensation accruals 635 306
Depreciation 630 -
Deferred revenue 1,796 713
Accrued expenses 841 -
Accounts receivable 3,163 292
Other 558 545
---------- ----------
Gross deferred tax asset 41,599 47,048
---------- ----------
DEFERRED TAX LIABILITIES:
Capitalized software (274) (220)
Depreciation - (453)
---------- ----------
Gross deferred tax liability (274) (673)
---------- ----------
Valuation allowance (41,325) (46,375)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
The Company's net operating loss carryforwards expire in varying
amounts from 1999 through 2019. Research and development tax credit
carryforwards expire in varying amounts from 1999 through 2019. Minimum tax
credit carryforwards do not expire and carry forward indefinitely. Net operating
losses related to the Company's foreign subsidiaries (totaling $ 7,222) are
available to offset future foreign taxable income.
The Company has experienced substantial changes in ownership as defined
by the Internal Revenue Code. These changes result in annual limitations of the
amount of net operating loss carryforward generated prior to each change which
can be utilized to offset future taxable income. As a result of the ownership
change at CLI at the date of the Merger, a portion of CLI's net operating loss
carryforward generated prior to the Merger will never be available to offset
future taxable income due to the effect of the annual limitation and the
expiration of the related net operating losses.
At July 31, 1999, the Company had total domestic net operating loss
carryforwards of $113,948 ($40,530 and $73,418 for VTEL and CLI, respectively).
The portions of these carryforwards available for utilization during fiscal 2000
(in consideration of the annual limitations) are $83,048. Additional net
operating losses created prior to the changes in control of $2,574 become
available in each subsequent year and accumulate if not used until such net
operating losses expire.
Due to the uncertainty surrounding the timing of realizing the bene-
its of its favorable tax attributes in future tax returns, the Company has
placed a valuation allowance against its net deferred tax asset. Accordingly, no
deferred tax benefits have been recorded for the years ended July 31, 1997,
1998, and 1999.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
VTEL leases furniture and equipment, manufacturing facilities and
office space under noncancelable leases which expire at various dates through
2013. Certain leases obligate VTEL to pay property taxes, maintenance and repair
costs.
46
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Future minimum lease payments under all operating leases as of July 31, 1999
were as follows:
FISCAL YEAR ENDING:
2000 $ 7,289
2001 7,115
2002 6,647
2003 5,830
2004 5,435
Thereafter 32,380
-----------
$ 64,696
===========
Total rent expense under all operating leases for the years ended
July 31, 1997, 1998 and 1999 was $4,601, $4,301 and $4,520 respectively.
During the year ended July 31, 1998, the Company completed the planned
elimination of duplicate headquarter facilities by terminating the lease for the
former CLI headquarters. The landlord paid the Company a $1,800 termination fee
which is recorded (net of termination expenses) as Other Income in the
accompanying Statement of Operations.
In connection with the acquisition of certain of the assets of the
videoconferencing division of one of its German resellers, (see Note 3), the
Company entered into a five year licensing agreement pursuant to which the
Company will pay a license fee equal to 4% of the revenues generated by the
acquired assets with a minimum annual fee of $281 to $393 and a maximum annual
fee of $786.
Contingencies
The Company is the defendant or plaintiff in various actions which
arose in the normal course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse affect on
our financial condition, results of operation or cash flows.
The Company was previously involved in a legal dispute with Philips
Electronics North America Corporation ("Philips"). On May 25, 1999, the Company
announced a compromise settlement agreement between Philips and CLI. The
settlement agreement, valued at less than $900, stipulates payment by CLI in the
form of cash and a future payment under a note of $250 (See Note 8), as well as
warrants for VTEL common stock. These amounts had previously been accrued as
part of the reserve for contingent liabilities related to the merger (See Note
1). In addition, the settlement mutually releases each party from all future
claims, demands and causes of action.
14. SEGMENT INFORMATION
In 1999, the company adopted SFAS 131. The Company manages its business
primarily on a products and services basis. The Company's reportable segments
are Products and Services/Other. The Products segment provides multi-media
visual communication (commonly referred to as videoteleconferencing) products to
customers primarily through a network of resellers, and to a lesser extent
directly to end-users. The Services/Other segment provides custom integrated
systems, installations and product support services to customers. The accounting
policies of the segments are the same as those described in Note 2.
The Company evaluates the performance of its segments and allocates
resources to them based on revenue and operating income; however, there is a
charge to allocate corporate operating expenses to the segments. The prior
year's segment information has been restated to present the Company's reportable
segments.
The table below presents segment information about revenue from
unaffiliated customers, depreciation and operating income for the three years
ended July 31, 1999:
47
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERVICES/
PRODUCTS OTHER CORPORATE/OTHER TOTAL
-------- --------- --------------- -----
<S> <C> <C> <C> <C>
FOR THE YEAR ENDING JULY 31, 1999
Revenues from unaffiliated customers $ 105,520 $ 46,082 $ - $ 151,602
Depreciation and amortization 168 1,884 9,745 11,797
Operating income (loss) 50,353 16,885 (82,803) (15,565)
FOR THE YEAR ENDING JULY 31, 1998
Revenues from unaffiliated customers $ 134,775 $ 44,909 $ - $ 179,684
Depreciation and amortization 219 932 7,719 8,870
Operating income (loss) 68,964 15,993 (82,178) 2,779
FOR THE YEAR ENDING JULY 31, 1997
Revenues from unaffiliated customers $ 150,791 $ 40,232 $ - $ 191,023
Depreciation and amortization* - - 12,667 12,667
Operating income (loss) 63,560 11,142 (118,973) (44,271)
<FN>
* The company deemed it impracticable to determine depreciation and
amortization related to its reportable segments for the year ending July 31,
1997.
</FN>
</TABLE>
Revenue and long-lived assets related to operations in the United
States and foreign countries for the three years ended July 31, 1999 are
presented below. Revenues generated between foreign geographic locations have
historically been insignificant.
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
Revenue from unaffiliated customers
United States $ 180,811 $ 163,381 $ 136,666
Foreign 10,212 16,303 14,936
Long-lived assets at the end of year
United States $ 36,104 $ 42,116 $ 51,806
Foreign 1,133 1,487 3,258
48
<PAGE>
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
15. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
The following tables contain selected unaudited consolidated statement
of income and earnings per share data for each quarter of fiscal year 1999.
FOR THE THREE MONTHS ENDED
OCT. 31, JAN 31, APRIL 30, JULY 31,
1998 1999 1999 1999
<S> <C> <C> <C> <C>
REVENUES:
Products $ 25,888 $ 26,386 $ 25,133 $ 28,113
Services and other 11,052 11,369 10,983 12,678
----------- ----------- ---------- ------------
Total revenues 36,940 37,755 36,116 40,791
----------- ----------- ---------- ------------
COST OF SALES:
Products 13,280 14,483 12,037 15,367
Services and other 7,348 7,485 6,362 8,002
----------- ----------- ---------- ------------
Total cost of sales 20,628 21,968 18,399 23,369
----------- ----------- ---------- ------------
Gross margin 16,312 15,787 17,717 17,422
----------- ----------- ---------- ------------
OPERATING EXPENSES:
Selling, general and administrative 18,503 15,916 13,254 13,182
Research and development 5,236 4,638 4,427 3,650
Amortization of intangible assets 252 259 379 381
Merger and other (235)
Restructuring expense - 2,915 203 (38)
----------- ----------- ---------- ------------
Total operating expenses 23,991 23,728 18,263 16,940
----------- ----------- ---------- ------------
Income (loss) from operations (7,679) (7,941) (546) 482
----------- ----------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest income 288 248 165 91
Interest expense and other (48) (251) (193) (231)
----------- ----------- ---------- ------------
240 (3) (28) (140)
----------- ----------- ---------- ------------
Net income (loss) before provision
For income taxes (7,439) (7,944) (574) 342
Provision for income taxes - - - 50
----------- ----------- ---------- ------------
NET INCOME (LOSS) $ (7,439) $ (7,944) $ (574) $ 392
=========== =========== ========== ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE: $ (0.32) (0.35) (0.02) 0.02
=========== =========== ========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 23,085 22,987 23,734 24,235
=========== =========== ========== ============
Diluted 23,085 22,987 23,734 24,919
=========== =========== ========== ============
</TABLE>
* *
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINAN-
CIAL DISCLOSURES
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the captions
"Election of Directors" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 26, 1999.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Executive Compensation" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 26, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" will be filed
with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or
before November 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption "Certain
Relationships and Transactions" will be filed with the Company's Definitive
Proxy Statement pursuant to the regulation 14A on or before November 26, 1999.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
(a)(1) The financial statements filed as part of this Report at Item 8 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 24 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item 8
is listed in the Index to Financial Statements and Financial Statement
Schedules on page 24 of this Report.
(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:
50
<PAGE>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
2.1 Agreement and Plan of Merger and Reorganization dated as of January 6, 1997
by and among VTEL, VTEL-Sub, Inc. and CLI (incorporated by reference to the
Exhibit 99.1 of VTEL's Report on Form 8-K dated January 6, 1997).
3.1 Fourth Amended Restated Certificate of Incorporation (incorporated by
reference the Exhibit 3.1 to the Company's quarterly report form 10-Q for
the period ended June 30, 1993.)
3.2 Amendment to Fourth Amended and Restated Certificate of Incorporation, as
filed on May 27, 1997 with the Secretary of State of Delaware (incorporated
by reference the Exhibit 3.1 to the Company's Annual Report on form 10-K
for the period ended July 31, 1997.)
3.3 Bylaws of the Company as adopted by the Board of Directors of the Company
effective as of June 11, 1989 (incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement on Form S-1, File No. 33-45876, as
amended).
3.4 Amendment to Bylaws of the Company as adopted by the Board of Directors of
the Company effective as of April 28, 1992 (incorporated by reference to
Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1992).
3.5 Amendment to the Bylaws of the Company as adopted by the Board of Directors
of the Company effective as of July 10, 1996 (incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K dated July 10,
1996).
4.1 Specimen Certificate for the Common Stock (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1, File No.
33-45876, as amended).
4.2 Rights Agreement dated as of July 10, 1996 between VTEL Corporation and
First National Bank of Boston, which includes the form of Certificate of
Designations for Designating Series A Preferred Stock, $.01 par value, the
form of Rights Certificate, and the Summary of Rights to Purchase Series A
Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 10, 1996).
10.1 License Agreement, dated as of November 7, 1990, between Universite de
Sherbrooke, as Licenser, and the Company, as Licensee (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form
S-1, File No. 33-45876, as amended).
10.2 VideoTelecom Corp. 1989 Stock Option Plan, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form S-8, File
No. 33-51822).
51
<PAGE>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.3 Form of VideoTelecom Corp. Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
10.4 Form of VideoTelecom Corp. Incentive Stock Option Agreement (incorporated
by reference to Exhibit 10.17 to the Company's Registration Statement on
Form S-1, File No. 33-45876, as amended).
10.5 Distributor Agreement dated January 8, 1990, between US WEST Communications
Services, Inc. and the Company (incorporated by reference to Exhibit 10.18
to the Company's Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.6 Purchase Agreement effective October 1, 1990, between GTE Service
Corporation and the Company, as amended July 1, 1991 (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement on Form
S-1, File No. 33-45876, as amended).
10.7 Distribution Agreement, made and entered into November 1, 1991, by and
between Microsoft Corporation and the Company (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form S-1, File No.
33-45876, as amended).
10.8 VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form S-8, File
No. 33-51822).
10.9 VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by reference
to Exhibit 4.1 to the Company's Registration on Form S-8, File No.
33-51822).
10.10 Lease agreement, executed by Waterford HP, Ltd. on June 14, 1994, as
Landlord, and the Company, as Tenant, together with First Amendment of
Lease Agreement between Waterford HP, Ltd., as Landlord, and the Company,
as Tenant, dated November 2, 1994, Second Amendment of Lease Agreement
between Waterford HP, Ltd., as Landlord, and the Company, as Tenant, dated
February 1, 1995, and Net Profits Agreement, executed between Waterford
HP, Ltd. on June 14, 1994 and the Company (incorporated by reference to
Exhibit 10.17 to the Company's 1994 Annual Report on Form 10-K).
10.11 Subscription Agreement dated June 14, 1995 by and between VTEL
Corporation, Accord Video Telecommunications, Ltd., Nizanim Fund (1993)
Ltd., the "Star Entities", Manakin Investments BV, Messrs. Gideon
Rosenfeld and Sigi Gavish, and Eduardo Shoval (incorporated by reference
to Exhibit 10.19 to the Company's 1995 Annual Report on Form 10-K. The
schedules referred to in the agreement have been omitted but will be
furnished to the Securities and Exchange Commission upon request).
10.12 Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and the 1992
Director Stock Option Plan (the terms of which are incorporated by
reference to the Company's 1996 Definitive Proxy Statement).
52
<PAGE>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.13 The VTEL Corporation 1996 Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1995 Definitive Proxy
Statement).
10.14 Amendment to the VTEL Corporation 1996 Stock Option Plan (the terms of
which are incorporated by reference to the Company's Joint Proxy Statement
filed on April 24, 1997).
10.15 Compression Labs, Incorporated 1980 Stock Option Plan - the ISO Plan
(incorporated by reference to the Annual Report on Form 10-K of
Compression Labs, Inc. for the year ended December 31, 1994).
10.16 Revised forms of Incentive Stock Option and Early Exercise Stock Purchase
Agreement used in connection with the issuance and exercise of options
under the ISO Plan (incorporated by reference to the Registration
Statement on Form S-8 of Compression Labs, Inc. filed on June 6, 1994).
10.17 Consulting and separation agreement between Compression Labs, Incorporated
and John E. Tyson dated February 16, 1996 (incorporated by reference to
the Annual Report on Form 10-K of Compression Labs, Inc. for the year
ended December 31, 1995).
10.18 Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc.,
Lessor and VTEL Corporation, Lessee (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the three months
ended April 30, 1998).
10.19 First Amendment, dated March 11, 1998, to Lease Agreement dated January
30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corporation,
Lessee (incorporated by reference to Exhibit 10.2 to the Company's
` Quarterly Report on Form 10-Q for the three months ended April 30, 1998).
10.20 The VTEL Corporation 1998 Restricted Stock Plan (the terms of which are
incorporated by reference to the Company's 1998 Definitive Proxy
Statement)
10.21 Loan and Security Agreement, dated May 5, 1999, between Silicon Valley
Bank and Comerica Bank-Texas, as Creditors, and the Company, as Borrower.
53
<PAGE>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.22 Change-in-Control Agreements with members of senior management of the
Company (incorporated by reference to exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999)
10.22 (a) Stephen L. Von Rump
10.22 (b) Rodney S. Bond
10.22 (c) Dennis M. Egan
10.22 (d) Vinay Goel
10.22 (e) Steve F. Keilen
10.22 (f) F.H. (Dick) Moeller
10.22 (g) Ly-Huong T. Pham
10.22 (h) Michael J. Steigerwald
10.22 (i) Bob R. Swem
10.22 (j) Judy A. Wallace
21.1 - List of Subsidiaries
23.1 - Consent of PricewaterhouseCoopers LLP.
27.1 - Financial Data Schedule (filed electronically only)
- ---------------
(B) Reports on Form 8-K:
Press release filed on October 1, 1999(incorporated by reference
to Form 8-K filed on October 1, 1999).
(C) See subitem 14(a)(3) above.
(D) See subitem 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VTEL Corporation
By /s/ Rodney S. Bond
----------------------------------
Rodney S. Bond
CHIEF FINANCIAL OFFICER,
VICE PRESIDENT-FINANCE,
SECRETARY AND ASSISTANT TREASURER
54
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen L. Von Rump President and Director October 29, 1999
- ------------------------------------------------ (Principal Executive Officer) ------------------------
Stephen L. Von Rump
/s/ Rodney S. Bond Chief Financial Officer, October 29, 1999
- ------------------------------------------------ Vice President - Finance, ------------------------
Rodney S. Bond Secretary and Assistant Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Eric L. Jones Director October 29, 1999
- ------------------------------------------------ ------------------------
Eric L. Jones
/s/ Max Hopper Director October 29, 1999
- ------------------------------------------------ ------------------------
Max Hopper
/s/ Gordon Matthews Director October 29, 1999
- ------------------------------------------------ ------------------------
Gordon Matthews
/s/ F.H. (Dick) Moeller Chairman of the Board October 29, 1999
- ------------------------------------------------ ------------------------
F.H. (Dick) Moeller
/s/ Dick Snyder Director October 29, 1999
- ------------------------------------------------ ------------------------
Dick Snyder
/s/ T. Gary Trimm Director October 29, 1999
- ------------------------------------------------ ------------------------
T. Gary Trimm
</TABLE>
55
<PAGE>
VTEL CORPORATION
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
- -------------------------------------------------------------------------------------------------------------------
PROVISION FOR WRITE-OFF OF
BALANCE AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING ACCOUNTS ACCOUNTS END OF
OF PERIOD RECEIVABLE RECEIVABLE YEAR
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts receivable -
Allowances for
Doubtful accounts
Year ended July 31, 1997 7,875 6,086 (3,239) 10,722
Year ended July 31, 1998 10,722 (119) (1,156) 9,447
Year ended July 31, 1999 9,447 278 (8,502) 1,223
</TABLE>
56
EXHIBIT 10.21
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BY AND AMONG
SILICON VALLEY BANK,
COMERICA BANK-TEXAS
AND
VTEL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
R E C I T A L S...................................................................................................1
AGREEMENT.........................................................................................................1
1. DEFINITIONS AND CONSTRUCTION.............................................................................1
1.1 Definitions.....................................................................................1
1.2 Accounting and Other Terms.....................................................................11
2. LOAN AND TERMS OF PAYMENT...............................................................................11
2.1 Credit Extensions..............................................................................11
2.1.1 Advances..............................................................................12
2.1.2 Letters of Credit.....................................................................12
2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements...............................14
2.2 Overadvances...................................................................................16
2.3 Interest Rates, Payments, and Calculations.....................................................17
2.4 Crediting Payments.............................................................................19
2.5 Fees...........................................................................................19
2.6 Additional Costs...............................................................................20
2.7 Term...........................................................................................21
2.8 Pro Rata Treatment.............................................................................21
2.9 Sharing of Payments, etc.......................................................................22
3. CONDITIONS OF LOANS.....................................................................................23
3.1 Conditions Precedent to Initial Credit Extension...............................................23
3.2 Conditions Precedent to all Credit Extensions..................................................23
4. CREATION OF SECURITY INTEREST...........................................................................24
4.1 Grant of Security Interest.....................................................................24
4.2 Delivery of Additional Documentation Required..................................................24
4.3 Right to Inspect...............................................................................24
4.4 Single Loan....................................................................................25
5. REPRESENTATIONS AND WARRANTIES..........................................................................25
5.1 Due Organization and Qualification.............................................................25
5.2 Due Authorization; No Conflict.................................................................25
5.3 No Prior Encumbrances..........................................................................25
5.4 Bona Fide Eligible Accounts....................................................................25
5.5 Merchantable Inventory.........................................................................25
5.6 Name; Location of Chief Executive Office.......................................................25
5.7 Litigation.....................................................................................26
5.8 No Material Adverse Change in Financial Statements.............................................26
i
<PAGE>
5.9 Solvency.......................................................................................26
5.10 Regulatory Compliance..........................................................................26
5.11 Environmental Condition........................................................................26
5.12 Taxes..........................................................................................27
5.13 Subsidiaries...................................................................................27
5.14 Government Consents............................................................................27
5.15 Full Disclosure................................................................................27
5.16 Intellectual Property..........................................................................27
5.17 No Subordinated Debt...........................................................................27
5.18 Year 2000 Reprogramming........................................................................27
6. AFFIRMATIVE COVENANTS...................................................................................28
6.1 Good Standing..................................................................................28
6.2 Government Compliance..........................................................................28
6.3 Financial Statements, Reports, Certificates....................................................28
6.4 Inventory; Returns.............................................................................29
6.5 Taxes..........................................................................................29
6.6 Insurance......................................................................................30
6.7 Quick Ratio....................................................................................30
6.8 Debt-Tangible Net Worth Ratio..................................................................30
6.9 Tangible Net Worth.............................................................................31
6.10 Profitability..................................................................................31
6.11 Registration of Intellectual Property Rights...................................................31
6.12 Lockbox Account................................................................................32
6.13 ERISA..........................................................................................32
6.14 Year 2000 Compliance...........................................................................33
6.15 Notice of Events...............................................................................33
6.16 Further Assurances.............................................................................33
7. NEGATIVE COVENANTS......................................................................................33
7.1 Dispositions...................................................................................33
7.2 Changes in Business, Ownership, Management, or Chief Executive Office.........................34
7.3 Mergers or Acquisitions........................................................................34
7.4 Indebtedness...................................................................................34
7.5 Encumbrances...................................................................................34
7.6 Distributions..................................................................................34
7.7 Investments....................................................................................34
7.8 Transactions with Affiliates...................................................................35
7.9 Subordinated Debt..............................................................................35
7.10 Inventory......................................................................................35
7.11 Compliance.....................................................................................35
7.12 Intellectual Property Agreement................................................................35
7.13 Foreign Assets.................................................................................35
7.14 ERISA Compliance. .....................................................................36
ii
<PAGE>
8. EVENTS OF DEFAULT.......................................................................................36
8.1 Payment Default................................................................................36
8.2 Covenant Default...............................................................................36
8.3 Material Adverse Change........................................................................37
8.4 Attachment.....................................................................................37
8.5 Insolvency.....................................................................................37
8.6 Other Agreements...............................................................................37
8.7 Subordinated Debt..............................................................................37
8.8 Judgments......................................................................................37
8.9 Misrepresentations.............................................................................37
8.10 ERISA..........................................................................................38
9. SERVICING AGENT'S AND LENDERS' RIGHTS AND REMEDIES......................................................38
9.1 Rights and Remedies............................................................................38
9.2 Power of Attorney..............................................................................39
9.3 Accounts Collection............................................................................40
9.4 Lenders' Expenses..............................................................................40
9.5 Lenders' Liability for Collateral..............................................................40
9.6 Remedies Cumulative............................................................................40
9.7 Demand; Protest................................................................................41
10. NOTICES.................................................................................................41
11. CHOICE OF LAW AND VENUE.................................................................................42
12. PARTICIPATION...........................................................................................42
12.1 Participation Interest.........................................................................42
12.2 No Obligation..................................................................................42
13. THE SERVICING AGENT.....................................................................................43
13.1 Appointment, Powers and Immunities.............................................................43
13.2 Representations and Warranties: No Responsibility for Inspection..............................44
13.3 Reliance by Servicing Agent....................................................................44
13.4 Delegation of Duties...........................................................................45
13.5 Right to Indemnity.............................................................................45
13.6 Resignation and Appointment of Successor Servicing Agent.......................................45
13.7 Conflicts......................................................................................46
13.8 No Obligations of Borrower.....................................................................46
13.9 Amendments in Writing; Integration.............................................................46
14. GENERAL PROVISIONS......................................................................................47
14.1 Successors and Assigns.........................................................................47
14.2 INDEMNIFICATION................................................................................47
14.3 Time of Essence................................................................................47
14.4 Severability of Provisions.....................................................................47
iii
<PAGE>
14.5 Counterparts...................................................................................47
14.6 Survival.......................................................................................47
14.7 Confidentiality................................................................................48
14.8 WAIVER OF JURY TRIAL...........................................................................48
14.9 NOTICE OF FINAL AGREEMENT......................................................................48
EXHIBIT A............................................................................A-1
EXHIBIT B............................................................................B-1
EXHIBIT C............................................................................C-1
EXHIBIT D............................................................................D-1
EXHIBIT E............................................................................E-1
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Agreement") is
entered into as of May 5, 1999, by and among SILICON VALLEY BANK, a
California-chartered bank on its own behalf ("SVB"), with its principal place of
business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan
production office located at 9020 Capital of Texas Highway North, Building 1,
Suite 350, Austin, Texas 78759, COMERICA BANK-TEXAS, a Texas state banking
association ("Comerica") with an address of 1601 Elm Street, Dallas, Texas
75201, P.O. Box 650282, Dallas, Texas 75265-0282, as assignee and transferee of
Chase Bank of Texas, National Association f/k/a Texas Commerce Bank National
Association ("Chase") (each of SVB in its capacity as a lender, but not as an
agent, and Comerica individually a "Lender" and collectively "Lenders"), VTEL
CORPORATION, a Delaware corporation ("Borrower"), with its principal place of
business at 108 Wild Basin Road, Austin, Texas 78746, and SVB, as Servicing
Agent for the Lenders ("Servicing Agent").
R E C I T A L S
---------------
SVB, Chase and Borrower entered into that certain Loan and Security
Agreement and Schedules relating thereto dated as of December 4, 1997, as
amended by that certain First Amendment dated as of October 31, 1998, as further
amended by that certain Second Amendment dated to be effective October 31, 1998,
as further amended by that certain Third Amendment dated to be effective January
31, 1999 ("Original Loan Agreement") whereby SVB, Chase and Borrower set forth
the terms and conditions under which SVB and Chase would extend certain credit
to Borrower and whereby Borrower would repay amounts owing to SVB and Chase.
Chase has transferred all of its right, title and interest in and to the
Original Loan Agreement to Comerica. SVB, Comerica and Borrower desire to amend
and restate the Original Loan Agreement to properly reflect certain changed
terms and conditions with respect to SVB's and Comerica's extension of credit to
Borrower and Borrower's repayment of amounts to SVB and Comerica. Accordingly,
the Original Loan Agreement is hereby amended and restated in its entirety to
hereafter read as follows:
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following
terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
1
<PAGE>
"Advance" or "Advances" means a loan advance under
the Committed Revolving Line.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, or any Person
that controls or is controlled by or is under common control with such Person
(whether by contract, ownership of voting securities or otherwise).
"Borrower's Books" means all of Borrower's books and
records including, without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" means an amount equal to eighty
percent (80%) of Eligible Accounts, as determined with reference to the most
recent Borrowing Base Certificate delivered by Borrower.
"Business Day" means (i) any day that is not a
Saturday, Sunday, or other day on which banks in the State of Texas or the State
of California are authorized or required to close, and (ii) with respect to all
notices and determinations in connection with, and payments of principal and
interest on any U.S. Dollar Advance which bears interest by reference to an
interbank offering rate and any Advance made in a currency other than U.S.
Dollars, any day which is a Business Day described in clause (i) and which is
also a day on which commercial banks are open for international business
(including dealings in the currency in which such Advance is denominated) in the
location of the relevant interbank market and the place where such funds are to
be paid or made available.
"Closing Date" means the date of this Agreement.
"Collateral" means the property described on Exhibit
A attached hereto, excluding (i) any interests in that agreement entitled "Wild
Basin Net Proceeds Agreement" dated March 11,1998, (ii) any interests in that
agreement entitled "Waterford: Memorandum of Net Profits Agreement" dated June
15, 1994, and (iii) any interest in the capital stock of Accord Video
Telecommunications Ltd.
"Commitment" means, with respect to each Lender, the
amounts set forth in the Addendum to Agreement attached hereto and "Commitments"
means, with respect to each Lender or each facility hereunder, as the case may
be, all such amounts collectively, as each may be amended from time to time.
"Commitment Percentage" means, as to any Lender, for
any credit facility hereunder, the percentage equivalent of such Lender's
Commitment for such facility divided by the aggregate amount of all Commitments
under such facility.
"Committed Revolving Line" means a credit extension
of up to Twenty Million and No/100 Dollars ($20,000,000.00).
2
<PAGE>
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to any Indebtedness, lease, dividend, letter of credit or
other obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed (otherwise than for collection or
deposit in the ordinary course of business), co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"Copyrights" means, any and all copyright rights,
copyright applications, copyright registrations and like protections of the
Borrower in each work or authorship and derivative work thereof, whether
published or unpublished and whether or not the same also constitutes a trade
secret, now or hereafter existing, created, acquired or held by Borrower.
"Credit Extension" means each Advance, Letter of
Credit (including all issued but undrawn and drawn but unreimbursed Letters of
Credit), Letter of Credit Reserve, Exchange Contract, Foreign Exchange Reserve
or any other extension of credit by Lenders for the benefit of Borrower
hereunder.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all Indebtedness and other amounts that should, in accordance with GAAP,
be included as current liabilities on the consolidated balance sheet of Borrower
and its Subsidiaries, as at such date, plus, to the extent not already included
therein, all outstanding Advances made under this Agreement, but excluding
Subordinated Debt and any Indebtedness that is otherwise included in Current
Liabilities in accordance with GAAP, but which is renewable or extendable at the
option of Borrower to a date more than one year from the date of determination.
"Eligible Accounts" means those Accounts of Borrower
(and not any of its Subsidiaries) that arise in the ordinary course of
Borrower's business, that Servicing Agent has been granted a first priority Lien
against for the benefit of Lenders, and that comply with all of Borrower's
representations and warranties to Servicing Agent and Lenders set forth in
Section 5.4; provided, that standards of eligibility may be fixed and revised
from time to time by Servicing Agent and Requisite Lenders in their reasonable
judgement upon notification thereof to Borrower in accordance with the
provisions hereof. Unless otherwise agreed to by Requisite Lenders, in writing,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
3
<PAGE>
(b) Accounts with respect to an account debtor,
including Affiliates, twenty-five percent (25%) or more of whose Accounts the
account debtor (or its Affiliates, as applicable), has failed to pay within
ninety (90) days of invoice date, except for those Accounts listed on the
Schedule and as approved in writing by Servicing Agent and Requisite Lenders;
(c) Accounts with respect to an account debtor,
including Affiliates, whose total obligations to Borrower exceed twenty-five
percent (25%) of all Accounts of Borrower, but only to the extent such
obligations exceed the aforementioned percentage, except as approved in writing
by Servicing Agent and Requisite Lenders;
(d) Accounts with respect to which the account
debtor does not have its principal place of business in the United States,
except for Eligible Foreign Accounts;
(e) Accounts with respect to which the account
debtor is (a) the United States government or any department, agency, or
instrumentality thereof, or (b) a state or local governmental entity or any
department, agency, or instrumentality thereof which requires compliance with
such state's or local governmental entity's laws with respect to the assignment
of claims or accounts receivable in order for Servicing Agent to obtain a valid,
perfected, first-priority security interest in such Account; provided, however,
upon compliance with such laws and the valid assignment of such Account, such
Account shall be an Eligible Account;
(f) Accounts which are the subject of any dis-
pute or which could reasonably be deemed to result in set-off but only to the
extent of the amount in dispute or subject to set-off;
(g) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account debtor
may be conditional, sometimes referred to as "contra" accounts;
(h) Accounts with respect to which the account
debtor is an Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Servicing Agent believes, in its sole discretion, that there may be a basis for
dispute (but only to the extent of the amount subject to such dispute or claim),
or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(j) Accounts the collection of which Servicing
Agent or any Lender in good faith reasonably determines after reasonable inquiry
to be doubtful by reason of the account debtor's financial condition.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States and that are: (1) covered by credit insurance in
form and amount, and by an insurer, satisfactory to Servicing Agent and
Requisite Lenders less the amount of any deductible(s) which may be or become
owing thereon; or (2) supported by one or more letters of credit either advised
or negotiated through Servicing Agent
4
<PAGE>
or any Lender or in favor of Servicing Agent or any Lender as beneficiary, in an
amount and of a tenor, and issued by a financial institution, acceptable to
Servicing Agent and Requisite Lenders; or (3) that all Lenders approve on a
case-by-case basis.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time, and all rules, regulations,
rulings and interpretations adopted by the Internal Revenue Service or the
Department of Labor thereunder.
"ERISA Affiliate" shall mean any trade or business
(whether or not incorporated) which together with the Borrower or any Subsidiary
of the Borrower would be treated as a single employer under the provisions of
Title I or Title IV of ERISA.
"Federal Funds Effective Rate" shall mean, for any
day, a rate per annum equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published on the next succeeding Business Day by
the Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for the day of
such transactions received by the Servicing Agent from three Federal funds
brokers of recognized standing selected by it.
"Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in the
United States.
"GAAP" means generally accepted accounting principles
as in effect in the United States from time to time.
"Guarantor" means any present or future guarantor of
the Obligations.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services,
including, without limitation, reimbursement and other obligations with respect
to surety bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease obligations, (d)
all Contingent Obligations, and (e) all Indebtedness and obligations secured by
any Lien on any property owned by such Person even though such Person has not
assumed or has not otherwise become liable for the payment of such Indebtedness
or obligation.
"Intellectual Property" means (a) Copyrights,
Trademarks, Patents, and Mask Works of Borrower, (b) Any and all trade secrets,
and any and all intellectual property rights in computer software and computer
software products now or hereafter existing, created, acquired or held by
Borrower, (c) Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held by Borrower, (d) Any and all
claims for damages by way of past, present and future infringement of any of the
rights included above, with the right, but not the obligation, to sue for and
collect such damages for said use or infringement of the intellectual
5
<PAGE>
property rights identified above, (e) All licenses or other rights to use any of
the Copyrights, Patents, Trademarks, or Mask Works, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights, (f) All amendments, renewals and extensions of any of the Copyrights,
Trademarks, Patents, or Mask Works and (g) All proceeds and products of the
foregoing, including without limitation all payments under insurance or any
indemnity or warranty payable in respect of any of the foregoing.
"Insolvency Proceeding" means any proceeding
commenced by or against any Person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extensions generally with its creditors, or proceedings
seeking reorganization, arrangement, or other similar relief.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership (includ-
ing stock, partnership interest or other securities) of any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Lenders' Expenses" means all reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred by the
Servicing Agent, SVB, and Comerica, or any one or more of them in connection
with the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Servicing Agent's and each Lender's reasonable attorneys' fees
and expenses incurred in amending, enforcing or defending the Loan Documents,
(including fees and expenses of appeal or review, or those incurred in any
Insolvency Proceeding) whether or not suit is brought.
"Letter of Credit" means a letter of credit or
similar undertaking issued by Issuing Lender pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth
in Section 2.1.2.
"LIBOR Supplement" means the Amended and Restated
LIBOR Supplement to Agreement of even date herewith by and among Lenders,
Borrower and Servicing Agent as the same may be in effect from time to time.
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"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes that may be executed by Borrower in favor of Servicing Agent
or any Lender pursuant to this Agreement, and any other present or future
agreement entered into by and among Borrower and/or for the benefit of all of
the Lenders in connection with this Agreement, all as amended, extended or
restated from time to time.
"Mask Works" means all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired by Borrower;
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maximum Lawful Rate" means the maximum rate of
interest and the term "Maximum Lawful Amount" means the maximum amount of
interest that are permissible under applicable state or federal law for the type
of loan evidenced by the Loan Documents. If the Maximum Lawful Rate is increased
by statute or other governmental action subsequent to the date of this
Agreement, then the new Maximum Lawful Rate shall be applicable to the payments
provided for hereunder from the effective date thereof, unless otherwise
prohibited by applicable law.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper.
"Net Income" means, as to Borrower and its Subsidiar-
ies on a consolidated basis and for any period, the net income (or loss) after
tax for such period without giving effect to any extraordinary gain or gains as
determined in accordance with GAAP.
"Obligations" means all debt, principal, interest,
Lenders' Expenses and other amounts owed to any Lender or Servicing Agent by
Borrower pursuant to this Agreement or any other Loan Document, whether absolute
or contingent, due or to become due, now existing or hereafter arising,
including any interest that accrues after the commencement of an Insolvency
Proceeding and including any debt, liability, or obligation owing from Borrower
to others that all of the Lenders or Servicing Agent may have obtained by
assignment or otherwise.
"Other Obligor" shall mean any entity or individual,
including, without limitation, any Guarantor, who (i) is obligated to pay any
Credit Extension or any other Obligation, or (ii) otherwise is or becomes
obligated to pay any Credit Extension or any other Obligation (for example, as
cosigner or guarantor), or (iii) has pledged property as security for payment of
any Credit Extension or any other Obligation.
"PBGC" shall mean the Pension Benefit Guaranty Corpo-
ration.
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"Patents" means, all patents, patent applications and
like protections of Borrower including, without limitation, improvements,
divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.
"Payment Date" means (a) for Prime Rate Credit
Extensions, the last day of each calendar month commencing on the first such
date after the Closing Date and ending on the Revolving Maturity Date; and (b)
for LIBOR rate Credit Extensions, at the end of the applicable Interest Period
(as defined in the LIBOR Supplement).
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Lenders
or Servicing Agent (but not SVB or Comerica individually in its capacity as a
lender) arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in
the ordinary course of business;
(e) Indebtedness secured by Permitted Liens;
(f) Capital lease obligations incurred in the
ordinary course of business not to exceed Three Million and No/100 Dollars
($3,000,000.00) in the aggregate for each fiscal year of Borrower (inclusive of
any sale-leaseback leases permitted under Section 7.1 hereof);
(g) Operating lease obligations incurred in the
ordinary course of business not to exceed (i) Three Million and No/100 Dollars
($3,000,000.00) in the aggregate for Borrower's fiscal quarters ending April 30,
1999 and July 31, 1999; (ii) Six Million and No/100 ($6,000,000.00) in the
aggregate for Borrower's fiscal year ending July 31, 2000 and (iii) Three
Million and No/100 ($3,000,000.00) in the aggregate for Borrower's fiscal
quarters ending October 31, 2000 and January 31, 2001;
(h) Research and development funding advanced by
third parties not to exceed Five Million and No/100 Dollars ($5,000,000.00) in
the aggregate incurred after the date of this Agreement;
(i) Letters of credit issued in the ordinary
course of Borrower's business by any financial institution (in addition to
Letters of Credit issued under the terms of Section 2.1.2 of this Agreement) for
the account of Borrower not to exceed Five Hundred Thousand and No/100 Dollars
($500,000.00) in the aggregate outstanding at any time; and
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(j) Extensions of any of items (a) through (i)
above, provided that with respect to the items set forth in (b) through (i)
above, the principal amount thereof is not increased or the terms thereof are
not modified to impose more burdensome terms upon Borrower.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any State or any
agency or instrumentality thereof maturing within one (1) year from the date of
acquisition thereof, (ii) commercial paper maturing no more than two (2) years
from the date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, Inc., (iii) certificates of deposit maturing no more than two (2) years
from the date of investment therein issued by SVB or Comerica and (iv)
Investments consistent with Borrower's January 18, 1996 Cash Portfolio
Investment Policy;
(c) Investments by Borrower in any Subsidiary of
Borrower permitted under Section 7.13 hereof; and
(d) Other Investments not otherwise prohibited
herein aggregating in excess of not more than One Million and No/100 Dollars
($1,000,000.00) at any one time.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP;
(c) Liens incidental to the conduct of business
or the ownership of properties and assets (including warehousemen's and
attorneys' liens and statutory landlords' liens) and deposits, pledges or Liens
to secure the performance of bids, tenders or trade contracts, or to secure
statutory obligations, surety or appeal bonds or other Liens of like general
nature incurred in the ordinary course of business and not in connection with
the borrowing of money; provided in each case, the obligation secured is not
overdue or, if overdue, (i) is being contested in good faith by appropriate
actions or proceedings, (ii) adequate reserves therefor have been set-up on the
financial statements of Borrower in accordance with GAAP and (iii) such Liens
shall not cause interference in any material respect with the ordinary conduct
of the business of Borrower;
(d) Liens securing capital lease obligations;
provided, that (i) the Indebtedness secured by any such Lien is incurred under
clause (f) of the definition of Permitted Indebtedness and (ii) any such Lien
encumbers only those assets so leased;
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(e) Liens securing operating lease obligations;
provided, that (i) the Indebtedness secured by any such Lien is incurred under
clause (g) of the definition of Permitted Indebtedness and (ii) any such Lien
encumbers only those assets so leased; and
(f) Liens incurred in connection with the exten-
sion, renewal or refinancing of the Indebtedness secured by Liens of the type
described in clauses (a) through (e) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the Indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Plan" shall mean any plan subject to Title IV of
ERISA and maintained for employees of the Borrower or of any member of a
"controlled group of corporations," as such term is defined in the Code, of
which the Borrower, any of its Subsidiaries or any ERISA Affiliate it may
acquire from time to time is a part, or any such plan to which the Borrower, any
of its Subsidiaries or any ERISA Affiliate is required to contribute on behalf
of its employees.
"Prime Rate" means the variable rate of interest, per
annum, quoted in The Wall Street Journal, under the section "Money Rates" as the
"Prime Rate", which rate may not be the lowest, best or most favorable rate of
interest which SVB, Comerica, or any other Lender may charge on loans to its
customers. In the event that more than one prime rate is quoted in The Wall
Street Journal, the highest quoted prime rate will be used as the Prime Rate. If
The Wall Street Journal ceases publication or if it ceases quoting or publishing
the "prime rate", Servicing Agent on behalf of Lenders will choose a new
reference or index which is based upon comparable information (that is, an
average of leading money center banks' prime rates).
"Quick Assets" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable net of contras and GAAP
required reserves, and Permitted Investments with maturities not to exceed one
(1) year, of Borrower and its Subsidiaries, all as determined in accordance with
GAAP.
"Reportable Event" shall mean a Reportable Event as
defined in Section 4043(b) of ERISA.
"Requisite Lenders" means, at any time, Lenders then
holding at least sixty-six and two-thirds percent (66 2/3%) of the then
aggregate unpaid principal amount of all Advances then outstanding or, if no
Advances are then outstanding, Lenders then having at least sixty-six and
two-thirds percent (66 2/3%) of the aggregate Commitments; provided, that in the
event there shall be only two Lenders, both of such Lenders.
"Responsible Officer" means each of the Chief Execu-
tive Officer, the Chief Operating Officer, the Chief Financial Officer and the
Treasurer of Borrower.
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"Revolving Maturity Date" means May 4, 2001.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Servicing Agent" means SVB, not in its individual
capacity, but solely in its capacity as agent for certain loan servicing
functions as detailed herein, on behalf of and for the benefit of Lenders, and
any successor agent as provided herein from time to time.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Lenders and
Servicing Agent on terms acceptable to Requisite Lenders and Servicing Agent
(and identified as being such by Borrower and the Requisite Lenders).
"Subsidiary" means with respect to any Person, any
corporation, partnership, company, association, joint venture, or any other
business entity of which more than fifty percent (50%) of the voting stock or
other equity interests is owned or controlled, directly or indirectly, by such
Person or one or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date,
the consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses,
except prepaid expenses, and (c) all reserves not already deducted from assets,
and (ii) Total Liabilities.
"Total Liabilities" means as of any applicable date,
any date as of which the amount thereof shall be determined, all obligations
that should, in accordance with GAAP, be classified as liabilities on the
consolidated balance sheet of Borrower, but specifically excluding Subordinated
Debt.
"Trademarks" means any trademark and servicemark
rights of Borrower, whether registered or not, applications to register and
registrations of the same and like protections, and the entire goodwill of the
business of Borrower connected with and symbolized by such trademarks.
1.2 Accounting and Other Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations and determinations made hereunder shall be made in accordance with
GAAP. When used herein, the term "financial statements" shall include the notes
and schedules thereto. The terms "including" and "includes" shall always be read
as meaning "including (or includes) without limitation", when used herein or in
any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 Credit Extensions. In accordance with the terms hereof,
Borrower promises to pay to Servicing Agent for the account of each Lender, in
lawful money of the United States of
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America, the aggregate unpaid principal amount of all Credit Extensions made by
Servicing Agent and Lenders to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Advances at rates and at times
in accordance with the terms hereof.
2.1.1 Advances. (a) Subject to and upon the terms
and conditions of this Agreement, and in reliance upon the representations and
warranties of Borrower set forth herein, each Lender severally agrees to make
its Commitment Percentage of Advances to Borrower up to the amount of such
Lender's respective Commitment; provided that the aggregate outstanding amount
of all Advances shall not exceed at any one time (i) the lesser of the Committed
Revolving Line and the Borrowing Base, minus (ii) the then outstanding principal
balance of all Credit Extensions. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1.1 may be repaid and
reborrowed at any time during the term of this Agreement.
(b) The Committed Revolving Line shall
terminate on the Revolving Maturity Date, at which time all Advances under this
Section 2.1.1 and other amounts due under this Agreement shall be immediately
due and payable.
(c) To evidence the Credit Extensions,
Borrower shall execute and deliver to each Lender a note ("Revolving Note") in
the original principal amount of such Lender's respective Commitment in the form
of Exhibit E attached hereto.
2.1.2 Letters of Credit.
(a) Subject to the terms and conditions
of this Agreement, from the date hereof through the Business Day immediately
prior to the Revolving Maturity Date, Lenders agree to issue or cause to be
issued Letters of Credit for the account of Borrower in an aggregate outstanding
face amount not to exceed (i) the lesser of the Committed Revolving Line and the
Borrowing Base minus (ii) the then outstanding principal balance of all Credit
Extensions; provided that the face amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) shall not in any event exceed Five Million and No/100 Dollars
($5,000,000.00) in the aggregate at any time. For purposes of this Agreement,
the amount outstanding under a Letter of Credit shall include the face amount of
such Letter of Credit, whether such Letter of Credit is issued but undrawn or
drawn but unreimbursed, and any Letter of Credit Reserve relating thereto. Each
Letter of Credit shall have an expiry date no later than the Revolving Maturity
Date. All Letters of Credit shall be, in form and substance, acceptable to the
Lender issuing the Letter of Credit (the "Issuing Lender") and the other Lenders
and shall be subject to the terms and conditions of the Issuing Lender's form of
standard application and Letter of Credit agreement, which shall provide, in
addition to an administrative fee of not more than one-sixteenth of one percent
(0.0625%) of the face amount of the Letter of Credit payable to Issuing Lender
only, for a Letter of Credit fee of not more than four-tenths of one percent
(0.40%) of the face amount of the Letter of Credit payable to Servicing Agent,
on behalf of the Issuing Lender and the other Lenders, as more fully set forth
in such Letter of Credit Agreement. Each Lender agrees that, in paying any
drawing under a Letter of Credit, the Issuing Lender shall not have any
responsibility to obtain any document (other than any document expressly
required by the Letter of Credit) or to ascertain or inquire as to the validity
or accuracy of any such document or the authority of the Person executing or
delivering any such document. NEITHER THE ISSUING LENDER NOR ANY OF ITS
AFFILIATES,
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CORRESPONDENTS, PARTICIPANTS OR ASSIGNEES, NOR ANY OF THEIR RESPECTIVE OFFICERS,
DIRECTORS OR EMPLOYEES, SHALL BE LIABLE TO ANY OTHER LENDER FOR ANY ACTION TAKEN
OR OMITTED TO BE TAKEN UNLESS SUCH ACTION OR OMISSION CONSTITUTES GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.
(b) The obligation of Borrower to immed-
iately reimburse the Issuing Lender for drawings made under Letters of Credit
shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement, the Letter of Credit
agreement and such Letters of Credit, under all circumstances whatsoever.
BORROWER SHALL INDEMNIFY, DEFEND, PROTECT, AND HOLD SERVICING AGENT AND EACH
LENDER HARMLESS FROM ANY AND ALL LOSS, COST, EXPENSE OR LIABILITY, INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES, ARISING OUT OF OR IN CONNECTION
WITH ANY LETTERS OF CREDIT, OTHER THAN SUCH LOSSES, COSTS, EXPENSES OR
LIABILITIES BASED UPON OR ARISING OUT OF THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE SERVICING AGENT OR SUCH LENDER.
(c) Borrower may request that Issuing
Lender issue a Letter of Credit payable in a currency other than United States
Dollars. If a demand for payment is made under any such Letter of Credit, the
Issuing Lender shall notify Lenders and Lenders shall treat such demand as an
Advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in Austin,
Texas for sales of that other currency for cable transfer to the country of
which it is the currency.
(d) Upon the issuance by any Lender of
any Letter of Credit payable in a currency other than United States Dollars,
such Lender shall create a reserve under the Committed Revolving Line for
Letters of Credit ("Letter of Credit Reserve") against fluctuations in currency
exchange rates, in an amount equal to ten percent (10%) of the face amount of
such Letter of Credit. The amount of such reserve may be amended by Lender from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Revolving Line shall be reduced by the amount of
such reserve for so long as such Letter of Credit remains outstanding.
(e) Simultaneously with any Issuing
Lender's issuance and delivery of any Letter of Credit, such Issuing Lender
shall be deemed, without further action, to have sold to each other Lender, and
such other Lender shall be deemed, without further action by any party hereto,
to have purchased from such Issuing Lender, a participation interest (which
participation shall be nonrecourse to such Issuing Lender) equal to such other
Lender's Commitment Percentage at such time in such Letter of Credit and all of
the Obligations related to such Letter of Credit; provided, that no such Lender
shall be obligated to participate in a particular Letter of Credit if such
Letter of Credit was issued or honored solely as a result of such Issuing
Lender's gross negligence or willful misconduct. Each Lender acknowledges and
agrees that its obligation to acquire participations in each Letter of Credit,
as well as its obligation to make the payments specified in this Section 2.1.2
and the right of such Issuing Lender to receive the same in the manner specified
herein, are absolute and unconditional and shall not be affected by any
circumstances whatsoever, including without limitation, the occurrence and
continuance of an Event of Default hereunder, and that each such payment shall
be made without any offset, abatement, withholding or reduction whatsoever.
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(f) The applicable Issuing Lender shall
review, on behalf of the Lenders, each draft and any accompanying documents
presented under a Letter of Credit issued by such Issuing Lender. Promptly after
it shall have ascertained that any draft and any accompanying documents
presented under such Letter of Credit appear on their face to be in conformity
with the terms and conditions of such Letter of Credit, such Issuing Lender
shall make the appropriate payment to the beneficiary of such Letter of Credit.
Such Issuing Lender shall give telephonic or facsimile notice to the Lenders of
the receipt and amount of any draft presented under any Letter of Credit and the
date on which payment thereon will be made, and each of the Lenders shall, by
2:00 p.m. Central Time on the date such payment is to be made under such Letter
of Credit, pay to such Issuing Lender in immediately available funds, an amount
equal to the product of (A) such Lender's Commitment Percentage times (B) the
amount of such payment to be made by the Issuing Lender to the beneficiary under
such Letter of Credit. Any Lender failing to timely deliver its requisite
portion of any such payment shall deliver the same to the Issuing Lender as soon
as possible thereafter, together with interest on such amount for each day from
the due date for such payment to the date of payment by such Lender to the
Issuing Lender of such amount at a rate of interest per annum equal to the
Federal Funds Effective Rate for such period. Each Lender hereby absolutely and
unconditionally assumes, as primary obligor and not as a surety, and agrees to
pay and discharge, and to indemnify and hold the Issuing Lender harmless from
liability and respect of, such Lender's pro rata share (based on such Lender's
Commitment Percentage) of any amounts owing by such Lender to the Issuing Lender
in accordance with the immediately preceding sentence. Nothing herein shall be
deemed to require any Lender to pay to the Issuing Lender any amount as
reimbursement for any payment made by the Issuing Lender to acquire (discount)
for its own account prior to maturity thereof any acceptance created under a
Letter of Credit.
2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements.
(a) Subject to the terms of this Agree-
ment, Borrower may enter into foreign exchange contracts with any Lender not to
exceed in any event Ten Million and No/100 Dollars ($10,000,000.00) in the
aggregate at any time ("Contract Limit"), pursuant to which such Lender shall
sell to or purchase from Borrower foreign currency on a spot or future basis
("Exchange Contracts"). Borrower shall not request any Exchange Contracts at any
time it is out of compliance with any of the provisions of this Agreement. All
Exchange Contracts must provide for delivery of settlement on or before the
Revolving Maturity Date. The amount available under the Committed Revolving Line
at any time shall be reduced by the following amounts ("Foreign Exchange
Reserve") on any given day (the "Determination Date"): (i) on all outstanding
Exchange Contracts on which delivery is to be effected or settlement allowed
more than two Business Days after the Determination Date, ten percent (10%) of
the gross amount of the Exchange Contracts; plus (ii) on all outstanding
Exchange Contracts on which delivery is to be effected or settlement allowed
within two Business Days after the Determination Date, one hundred percent
(100%) of the gross amount of the Exchange Contracts.
(b) Any Lender may, in its discretion,
terminate the Exchange Contracts at any time (i) that an Event of Default occurs
and is continuing or (ii) that there is not sufficient availability under the
Committed Revolving Line and Borrower does not have available funds in its bank
account to satisfy the Foreign Exchange Reserve. If any Lender terminates the
Exchange Contracts, and without limitation of any applicable indemnities,
Borrower agrees to
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reimburse each Lender for any and all fees, costs and expenses relating thereto
or arising in connection therewith.
(c) Borrower shall not permit the total
gross amount of all Exchange Contracts on which delivery is to be effected and
settlement allowed on any one (1) Business Day to be more than Two Million and
No/100 Dollars ($2,000,000.00) ("Settlement Limit") nor shall Borrower permit
the total gross amount of all Exchange Contracts to which Borrower is a party,
outstanding at any one time, to exceed the lesser of the (i) Contract Limit and
(ii) lesser of (A) the Committed Revolving Line minus all outstanding Credit
Extensions and (B) the Borrowing Base minus all outstanding Credit Extensions.
Notwithstanding the above, however, the amount which may be settled on any one
(1) Business Day may be increased above the Settlement Limit up to, but in no
event to exceed, the amount of the Contract Limit under either of the following
circumstances:
(i) if there is sufficient availability under the Committed
Revolving Line in the amount of the Foreign Exchange Reserve as of each
Determination Date, provided that Servicing Agent and Lenders in
advance shall reserve the full amount of the Foreign Exchange Reserve
against the Committed Revolving Line; or
(ii) if there is insufficient availability under the Committed
Revolving Line, as to settlements on any one (1) Business Day, provided
that Servicing Agent and Lenders, in their sole discretion, may: (A)
verify good funds overseas prior to crediting Borrower's deposit
account with the applicable Lender (in the case of Borrower's sale of
foreign currency); or (B) debit Borrower's deposit account with the
applicable Lender prior to delivering foreign currency overseas (in the
case of Borrower's purchase of foreign currency).
(d) In the case of Borrower's purchase of
foreign currency, Borrower in advance shall instruct Servicing Agent or the
applicable Lender upon settlement either to treat the settlement amount as an
Advance under the Committed Revolving Line, or to debit Borrower's account for
the amount settled.
(e) Borrower shall execute all standard
form applications and agreements of the applicable Lender in connection with the
Exchange Contracts and, without limiting any of the terms of such applications
and agreements, Borrower will pay all standard fees and charges of the
applicable Lender in connection with the Exchange Contracts.
(f) WITHOUT LIMITING ANY OF THE OTHER
TERMS OF THIS AGREEMENT OR ANY SUCH STANDARD FORM APPLICATIONS AND AGREEMENT OF
LENDERS OR SERVICING AGENT, BORROWER AGREES TO INDEMNIFY LENDERS AND SERVICING
AGENT AND HOLD THEM HARMLESS, FROM AND AGAINST ANY AND ALL CLAIMS, DEBTS,
LIABILITIES, DEMANDS, OBLIGATIONS, ACTIONS, COSTS AND EXPENSES (INCLUDING,
WITHOUT LIMITATION, ATTORNEYS' FEES OF COUNSEL OF LENDERS' CHOICE), OF EVERY
NATURE AND DESCRIPTION WHICH IT MAY SUSTAIN OR INCUR, BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO ANY OF THE EXCHANGE CONTRACTS OR ANY TRANSACTIONS
RELATING THERETO OR CONTEMPLATED THEREBY OTHER THAN SUCH LOSSES, COSTS, EXPENSES
OR LIABILITIES BASED
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UPON OR ARISING OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE
SERVICING AGENT OR SUCH LENDER.
(g) Simultaneously with any Lender's
entering into with Borrower any Exchange Contract ("Applicable Lender"), such
Applicable Lender shall be deemed, without further action, to have sold to each
other Lender, and each such other Lender shall be deemed, without further action
by any party hereto, to have purchased from such Applicable Lender,
participation interest (which participation shall be nonrecourse to such
Applicable Lender) equal to such other Lender's Commitment Percentage at such
time in such Exchange Contract and all of the Obligations related to such
Exchange Contract; provided, that no such Lender shall be obligated to
participate in a particular Exchange Contract if such Exchange Contract was
issued or honored solely as a result of such Applicable Lender's gross
negligence or willful misconduct. Each Lender acknowledges and agrees that its
obligation to acquire participations in each Exchange Contract, as well as its
obligation to make the payments specified in this Section 2.1.3 and the right of
such Applicable Lender to receive the same in the manner specified herein, are
absolute and unconditional and shall not be affected by any circumstances
whatsoever, including without limitation, the occurrence and continuance of an
Event of Default hereunder, and that each such payment shall be made without any
offset, abatement, withholding or reduction whatsoever.
(h) The Applicable Lender with respect
to any Exchange Contract shall review, on behalf of the Lenders, all documents
presented under such Exchange Contract. Promptly after it shall have ascertained
that all accompanying documents presented under such Exchange Contract appear on
their face to be in conformity with the terms and conditions of such Exchange
Contract, such Applicable Lender shall effect delivery or allow settlement
thereof. Such Applicable Lender shall give telephonic or facsimile notice to the
Lenders of the amount and the date on which delivery is to be effected or
settlement allowed, and each of the Lenders shall, by 2:00 p.m. Central Time on
the date such delivery is to be effected or settlement allowed under such
Exchange Contract, pay in immediately available funds, an amount equal to the
product of (A) such Lender's Commitment Percentage times (B) the amount of such
payment to be made by the Applicable Lender under such Exchange Contract. Any
Lender failing to timely deliver its requisite portion of any such payment shall
deliver the same to the Applicable Lender as soon as possible thereafter,
together with interest on such amount for each day from the due date for such
payment to the date of payment by such Lender to the Applicable Lender of such
amount at a rate of interest per annum equal to the Federal Funds Effective Rate
for such period. Each Lender hereby absolutely and unconditionally assumes, as
primary obligor and not as a surety, and agrees to pay and discharge, and to
indemnify and hold the Applicable Lender harmless from liability and respect of,
such Lender's pro rata share (based on such Lender's Commitment Percentage) of
any amounts owing by such Lender to the Applicable Lender in accordance with the
immediately preceding sentence.
2.2 Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower pursuant to Section 2.1.1, 2.1.2 and
2.1.3 of this Agreement is greater than the lesser of (i) the Committed
Revolving Line and (ii) the Borrowing Base, Borrower shall immediately pay to
Servicing Agent, in cash, for the ratable benefit of Lenders, the amount of such
excess.
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2.3 Interest Rates, Payments, and Calculations.
(a) LIBOR Option/Interest Rate. Except as set
forth in Section 2.3(b), any and all Advances shall bear interest, on the
average daily balance thereof, at a per annum rate equal to, at Borrower's
option and subject to the terms hereof, the Prime Rate plus one-half percent
(0.5%) or the rate specified in the LIBOR Supplement.
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence, and during the continuance, of an Event
of Default, at the "Default Interest Rate." The Default Interest Rate shall be
the interest rate applicable immediately prior to the occurrence of the Event of
Default plus five (5) percentage points but in no event more than the Maximum
Lawful Rate or at a rate that would cause the total interest contracted for,
charged or received by any Lender to exceed the Maximum Lawful Amount.
(c) Payments. Interest hereunder shall be due
and payable on each Payment Date. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) Computation.
(i) Changes. In the event the Prime Rate
is changed from time to time hereafter, the applicable rate of interest
hereunder shall be increased or decreased effective as of 12:01 a.m. on the day
the Prime Rate is changed, by an amount equal to such change in the Prime Rate.
(ii) Spreading of Interest. Because of
the possibility of irregular periodic balances of principal, the fluctuating
nature of the interest rate, or premature payment, the total interest that will
accrue under this Agreement cannot be determined in advance. Lenders do not
intend to contract for, charge or receive more than the Maximum Lawful Rate or
Maximum Lawful Amount permitted by applicable state or federal law, and to
prevent such an occurrence Lenders and Servicing Agent and Borrower agree that
all amounts of interest, whenever contracted for, charged or received by Lenders
or Servicing Agent, with respect to the loan of money evidenced by the Loan
Documents, shall be spread, prorated or allocated over the full period of time
the Obligations are unpaid, including the period of any renewal or extension
thereof. If the maturity of the Obligations is accelerated for any reason
whether as a result of a lawsuit or an Event of Default or otherwise prior to
the full stated term, the total amount of interest contracted for, charged or
received to the time of such demand shall be spread, prorated or allocated along
with any interest thereafter accruing over the full period of time that the
Obligations thereafter remain unpaid for the purpose of determining if such
interest exceeds the Maximum Lawful Amount.
(iii) Excess Interest. At maturity
(whether by acceleration or otherwise) or on earlier final payment of the
Obligations, each Lender shall compute the total amount of interest that has
been contracted for, charged or received by such Lender or payable by Borrower
hereunder to such Lender and compare such amount to the Maximum Lawful Amount
that could have been contracted for, charged or received by such Lender. If such
computation reflects that the total amount of interest that has been contracted
for, charged or received by such Lender or payable by Borrower to such Lender
exceeds the Maximum Lawful Amount, then such Lender shall apply such excess to
the reduction of the principal balance owing to it and not to the payment of
interest;
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or if such excess interest exceeds the unpaid principal balance owing to such
Lender, such excess shall be refunded to Borrower. This provision concerning the
crediting or refund of excess interest shall control and take precedence over
all other agreements between Borrower and Lenders so that under no circumstances
shall the total interest contracted for, charged or received by any Lender
exceed the Maximum Lawful Amount.
(iv) Daily Computation of Interest. To
the extent permitted by applicable law, the Lenders at their option may either
(i) calculate the per diem interest rate or amount based on the actual number of
days in the year (365 or 366, as the case may be), and charge that per diem
interest rate or amount each day, or (ii) calculate the per diem interest rate
or amount as if each year has only 360 days, and charge that per diem interest
rate or amount each day for the actual number of days of the year (365 or 366 as
the case may be). If the Loan Documents call for monthly payments, the Lenders
at their option may determine the payment amount based on the assumption that
each year has only 360 days and each month has 30 days. In no event shall
Lenders compute the interest in a manner that would cause Lenders to contract
for, charge or receive interest that would exceed the Maximum Lawful Rate or the
Maximum Lawful Amount. The foregoing notwithstanding, all Lenders shall
calculate per diem interest in the same manner at all times, and in no event
shall the method of daily computation of interest vary between or among any of
the Lenders.
(v) Revolving Loan Accounts and Usury
Ceiling. In no event shall Chapter 346 of the Texas Finance Code, as
supplemented by the Texas Credit Code ("Texas Finance Code") (which regulates
certain revolving loan accounts and revolving tri-party accounts) apply to this
Agreement or Borrower's payment obligations hereunder. To the extent that
Chapter 303 of the Texas Finance Code, is applicable to this Agreement, the
"weekly ceiling" specified in such Chapter 303 is the applicable ceiling;
provided that, if any applicable law permits greater interest, the law
permitting the greatest interest shall apply.
(e) Borrowing Procedures.
(i) Whenever Borrower desires an Advance,
Borrower will notify Servicing Agent by facsimile transmission or telephone no
later than 1:00 p.m. Central time, one (1) Business Day before the Business Day
on which a Prime Rate Advance is to be made and 2:00 p.m. Central Time on the
Business Day that is three (3) Business Days prior to the Business Day a LIBOR
rate Advance is to be made. Servicing Agent shall promptly deliver such notice
to the Lenders, and each Lender shall make its applicable Advance available on
the proposed date thereof by paying such amount in immediately available funds
not later than 2:00 p.m. Central Time to Servicing Agent. Any Lender failing to
timely deliver its requisite portion of any such payment shall deliver the same
to Servicing Agent as soon as possible thereafter, together with interest on
such amount for each day from the due date for such payment to the date of
payment by such Lender to Servicing Agent of such amount at a rate of interest
per annum equal to the Federal Funds Effective Rate for such period. Each such
notification by Borrower shall be promptly confirmed by a Payment/Advance Form
in substantially the form of Exhibit B hereto or a LIBOR rate Advance Form as
attached to the LIBOR Supplement. Servicing Agent is authorized to make Advances
under this Agreement or under the LIBOR Supplement, based upon instructions
received from a Responsible Officer or a designee of a Responsible Officer, or
without instructions if in Servicing Agent's discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Servicing
Agent and
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Lenders shall be entitled to rely on any telephonic notice given by a person
whom Servicing Agent or Lenders reasonably believe to be a Responsible Officer
or a designee thereof, and BORROWER SHALL INDEMNIFY AND HOLD SERVICING AGENT AND
THE LENDERS HARMLESS FROM AND AGAINST ANY DAMAGES OR LOSS SUFFERED BY SERVICING
AGENT OR EITHER LENDER AS A RESULT OF SUCH RELIANCE OTHER THAN SUCH LOSSES,
COSTS, EXPENSES OR LIABILITIES BASED UPON OR ARISING OUT OF THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT OF THE SERVICING AGENT OR SUCH LENDER.
(ii) Whenever Borrower desires the
issuance of a Letter of Credit, Borrower will notify the applicable Issuing
Lender (and the Servicing Agent, if the Servicing Agent is not the applicable
Issuing Lender) by facsimile transmission no later than 1:00 p.m. Central time,
five (5) Business Days before the Business Day on which the Letter of Credit is
to be issued. The applicable Issuing Lender shall promptly deliver such notice
to the other Lenders and shall promptly confirm to the other Lenders the actual
issuance of such requested Letter of Credit once issued.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Servicing Agent shall credit a wire transfer of funds, check or other
item of payment paid by Borrower to Servicing Agent, when received, to such
deposit account or Obligation as Borrower specifies. After the occurrence, and
during the continuance, of an Event of Default, the receipt by Servicing Agent
of any wire transfer of funds, check, or other item of payment, whether directed
to Borrower's deposit account with Servicing Agent or to the Obligations or
otherwise, shall be immediately applied to conditionally reduce Obligations, but
shall not be considered a payment in respect of the Obligations unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Servicing Agent after 2:00 p.m. Central time shall be deemed to have been
received by Servicing Agent as of the opening of business on the immediately
following Business Day. Whenever any payment to Servicing Agent under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Servicing Agent the
following:
(a) Facility Fee.
(i) A facility fee equal to One Hundred Thousand and No/100
Dollars ($100,000.00) which fee shall be fully earned and non-refundable and
which shall be payable to Servicing Agent, for the pro rata benefit of the
Lenders based on their respective Commitment Percentage, in four equal quarterly
installments of Twenty-Five Thousand and No/100 Dollars ($25,000.00) beginning
on the date hereof and on August 5, 1999, November 5, 1999 and May 5, 2000.
(ii) On the last day of each February, May, August and
November during the term through the Revolving Maturity Date, as well as on the
Revolving Maturity Date, a fee equal to .375% of the Committed Revolving Line
(based on actual days elapsed in a 360 day year) minus the average daily balance
of all outstanding Advances for the preceding fiscal quarter (i.e., Borrower's
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quarters ending in January, April, July, and October); provided the amount of
such fee shall be decreased by One Thousand One Hundred Twenty-Five and No/100
Dollars ($1,125.00) for the fiscal quarter ending April 30, 1999, July 31, 1999
and October 31, 1999 to properly reflect Borrower's current credit with SVB of
Three Thousand Three Hundred Seventy-Five and No/100 Dollars ($3,375.00).
Servicing Agent shall apportion the foregoing fees pro rata between Lenders
based upon their respective Commitment Percentages, and SVB's portion of such
fees shall be reduced by One Thousand One Hundred Twenty-Five and No/100 Dollars
($1,125.00) for the above described fiscal quarters to account for SVB's prior
receipt of the foregoing monies from Borrower and to insure that each Lender
receives it full .375% fee based on its respective Commitment Percentage.
(b) Financial Examination and Appraisal Fees. If
an Event of Default has occurred and is continuing, Borrower shall pay each
Lender's customary fees and out-of-pocket expenses for Lenders' audits of
Borrower's Accounts, and for each appraisal of Collateral and financial analysis
and examination of Borrower performed from time to time by Servicing Agent or
its agents or any Lender; provided, however, that the fees for the Lenders'
audits of Borrower's Accounts prior to the occurrence of an Event of Default
shall not exceed Two Thousand and No/100 Dollars ($2,000.00) per annum without
the prior approval of Borrower. Provided further, if no Event of Default exists,
(i) all such audits conducted by Lenders at Borrower's expense shall be
performed by one (1) audit team and shall not be conducted more often than once
each calendar year, and (ii) all such other audits conducted by Servicing Agent
or any Lender at the expense and cost of Servicing Agent or such Lender, as
applicable, shall not be conducted more often than eleven (11) times during any
calendar year. Any verification of any of Borrower's Accounts sent to any
account debtor of Borrower while no Event of Default has occurred which is then
continuing shall be on a form which is reasonably acceptable to Borrower and the
Servicing Agent or the applicable Lender.
(c) Lenders' Expenses. Upon demand from Servicing
Agent, including, without limitation, upon the date hereof, all Lenders'
Expenses incurred through the date hereof, including reasonable attorneys' fees
and expenses (with respect to audit fees, such fees shall be subject to the
limitation set forth in Section 2.5(b) above), and, after the date hereof, all
Lenders' Expenses, including reasonable attorneys' fees and expenses, as and
when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Servicing Agent or any Lender to any
tax with respect to payments of principal or interest or any other amounts
payable hereunder by Borrower or otherwise with respect to the transactions
contemplated hereby (except for taxes on the overall net income of Servicing
Agent or such Lender imposed by the United States of America or any political
subdivision thereof);
(b) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit, capital adequacy or similar
requirement against assets held by, or deposits in or for the account of, or
loans by, Servicing Agent or any Lender; or
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(c) imposes upon Servicing Agent or any Lender
any other condition with respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Servicing
Agent or such Lender, reduce the income receivable by or rate of return on
capital of Servicing Agent or such Lender or impose any expense upon Servicing
Agent or such Lender with respect to the Obligations, Servicing Agent or such
Lender shall notify Borrower thereof. Borrower agrees to pay to Servicing Agent
or such Lender the amount of such increase in cost, reduction in income or rate
of return on capital or additional expense as and when such cost, reduction or
expense is incurred or determined, upon presentation by Servicing Agent or such
Lender of a statement of the amount and setting forth Servicing Agent's or such
Lender's calculation thereof, all in reasonable detail, provided, however, that
notwithstanding anything herein to the contrary, (a) Borrower shall not be the
only borrower of such Lender subject to this type of provision which is
requested to pay such amounts for the applicable period and (b) Borrower shall
not be liable for any such costs incurred by such Lender more than one hundred
eighty (180) days prior to the date of the applicable notice given hereunder.
2.7 Term. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 14.6, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, pursuant to and subject to Section 9.1
below, Lenders shall have the right to terminate their obligation to make Credit
Extensions under this Agreement immediately upon the occurrence and during the
continuance of an Event of Default with notice thereof to Borrower; provided
however, if the Event of Default is an Insolvency Default, then the obligation
to make Credit Extensions shall automatically terminate without notice of any
kind. Notwithstanding termination of this Agreement, Servicing Agent's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding. Borrower shall have the right to terminate this Agreement without
premium or penalty with notice to Servicing Agent if there are no outstanding
Obligations, which Obligations shall include, without limitation, and for
purposes of clarification, all four installment payments of the facility fee set
forth in Section 2.5(a)(i) above, owing to Servicing Agent or any Lender.
2.8 Pro Rata Treatment.
(a) Except to the extent otherwise provided
herein, (i) each Credit Extension from the Lenders hereunder shall be made and
each payment of Obligations shall be made and applied for the account of the
Lenders, and each termination or reduction of the Commitments of the Lenders
shall be applied, pro rata, according to each Lender's Commitment Percentage;
(ii) each payment or prepayment by the Borrower of principal of or interest on
Advances shall be made to the Servicing Agent for the account of the Lenders pro
rata in accordance with the respective unpaid principal amounts of such Advances
held by the Lenders; (iii) the Lenders (other than the Issuing Lender) shall
purchase from the applicable Issuing Lender participations in the Letters of
Credit, to the extent of their respective Commitment Percentage, upon issuance
by an Issuing Lender of each Letter of Credit as otherwise provided for herein;
and (iv) the Lenders (other than the Applicable Lender) shall purchase from the
Applicable Lender participations in the applicable Exchange Contracts entered
into by such Applicable Lender, to the extent of their respective Commitment
Percentage, upon such Applicable Lender entering into an Exchange Contract as
otherwise provided for herein.
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(b) Unless the Servicing Agent shall have been
notified in writing by any Lender prior to the date of a proposed Advance that
such Lender will not make the amount that would constitute such Lender's
Commitment Percentage of such Advance on such date available to the Servicing
Agent, the Servicing Agent may assume that such Lender has made such amount
available to the Servicing Agent on such date, and the Servicing Agent may, in
reliance upon such assumption and subject to the terms and conditions of this
Agreement, make such amount available to the Borrower. Any Lender failing to
timely deliver its requisite portion of such Advance shall deliver the same to
the Servicing Agent as soon as possible thereafter, together with interest on
such amount for each day from the due date for such payment to the date of
payment by such Lender to the Servicing Agent of such amount at a rate of
interest per annum equal to the Federal Funds Effective Rate for such period. In
addition, the Borrower hereby agrees that upon demand by the Servicing Agent,
the Borrower shall reimburse the Servicing Agent for any such amount which any
Lender has failed to timely deliver to the Servicing Agent, but which the
Servicing Agent may have previously made available to the Borrower in accordance
with the other provisions of this Section 2.8(b). If a requested Advance shall
not occur on any date specified by the Borrower as set forth in the
Payment/Advance Form because all of the conditions for such Advance set forth
herein or in any of the other Loan Documents shall have not been met, the
Servicing Agent shall return the amounts so received from the Lenders in respect
of such requested Advance to the applicable Lenders as soon as practicable.
2.9 Sharing of Payments, etc. Borrower agrees that, in
addition to (and without limitation of) any right of set-off, bankers' lien or
counterclaim a Lender may otherwise have, each Lender shall be entitled after
the occurrence of an Event of Default which is continuing, at its option, to
offset balances held by it for the account of the Borrower at any of its offices
against any principal of or interest on any of such Lender's Obligations of the
Borrower hereunder which is not paid when due (regardless of whether such
balances are then due to the Borrower), in which case it shall promptly notify
the Borrower and the Servicing Agent thereof, provided, that such Lender's
failure to give such notice shall not affect the validity thereof. If a Lender
shall obtain payment of any principal of or interest on any Obligation then due
to such Lender hereunder, through the exercise of any right of set-off, banker's
lien, counterclaim or similar right, or otherwise, it shall promptly purchase
from the other Lenders participations in Obligations of the Borrower hereunder
of the other Lenders in such amounts, and make such other adjustments from time
to time as shall be equitable to the end that all the Lenders shall share the
benefit of such payment (net of any expenses which may be incurred by such
Lender in obtaining or preserving such benefit) pro rata in accordance with
their respective Commitment Percentage. To such end, all the Lenders shall make
appropriate adjustments among themselves (by the resale of participations sold
or otherwise) if such payment is rescinded or must otherwise be restored.
Borrower agrees, to the fullest extent it may effectively do so under applicable
law, that any Lender so purchasing a participation in the Obligations hereunder
of the other Lenders may exercise all rights of set-off, bankers' lien,
counterclaim or similar rights with respect to such participation as fully as if
such Lender were a direct holder of said Obligations in the amount of such
participation. Nothing contained herein shall require any Lender to exercise any
such right or shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of Borrower.
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3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. The
obligation of Lenders to make the initial Credit Extension is subject to the
condition precedent that Lenders shall have received, in form and substance
satisfactory to Lenders, the following:
(a) this Agreement and the Revolving Notes, all
duly executed by Borrower;
(b) a certificate of the Secretary of Borrower
with respect to certificate of incorporation, by-laws, incumbency and
resolutions authorizing the execution and delivery of this Agreement and all
other Loan Documents to be executed by Borrower;
(c) evidence reasonably necessary to confirm a
first priority perfected Lien (subject only to Permitted Liens) has been granted
by Borrower in favor of Servicing Agent for the benefit of Lenders against all
Collateral, including, without limitation, UCC-1 financing statements covering
the Collateral and in favor of Servicing Agent on behalf of and for the benefit
of Lenders and UCC-3 termination statements or assignments in favor of Servicing
Agent on behalf of and for the benefit of the Lenders from each Person that has
a security interest in the Collateral or any part thereof;
(d) insurance certificate;
(e) payment of the fees and Lenders' Expenses
then due specified in Section 2.5 hereof;
(f) Certificate of Foreign Qualification (if
applicable);
(g) the Amended and Restated LIBOR Supplement;
(h) an intellectual property security agreement
covering the Intellectual Property; and
(i) such other documents, and completion of such
other matters, as Lenders may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The
obligation of Lenders to make each Credit Extension, including the initial
Credit Extension, is further subject to the following conditions:
(a) timely receipt by Servicing Agent of the
Payment/Advance Form or the LIBOR rate Advance Form as provided in Section 2.1,
if applicable;
(b) satisfaction of the terms and conditions
contained in the LIBOR Supplement, if applicable;
(c) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form or the
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LIBOR rate Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension; and
(d) receipt by Servicing Agent of a subordination
of lien from each and every Person who leases real property to Borrower and at
which location Borrower now or hereafter maintains Inventory with a value of Two
Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) or greater (but
in any event at Borrower's locations in Austin, Texas and King of Prussia,
Pennsylvania), or evidence satisfactory to Servicing Agent and Lenders in their
sole and absolute discretion of the waiver of such landlord's liens from such
Person or Persons.
The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrower on the date of such Credit Extension as
to the accuracy of the facts referred to in Section 3.2(c).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to
Servicing Agent on behalf of and for the benefit of Lenders a continuing
security interest in all presently existing and hereafter acquired or arising
Collateral and all proceeds thereof, in order to secure prompt payment of any
and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Except as set forth
in the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof. Notwithstanding termination of this Agreement, Servicing Agent's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
4.2 Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Servicing Agent, at the request
of Servicing Agent or any Lender, all Negotiable Collateral, all financing
statements and other documents that Servicing Agent or any Lender may reasonably
request, in form reasonably satisfactory to Requisite Lenders, to perfect and
continue perfected Servicing Agent's security interests in the Collateral and in
order to fully consummate all of the transactions contemplated under the Loan
Documents.
4.3 Right to Inspect. Subject to the provisions of Section
2.5(b), including without limitation, any limitation with respect to the number
of inspections or audits prior to the occurrence and continuance of an Event of
Default, any Lender (through any of its officers, employees, or agents) shall
have the right, upon reasonable prior notice (except that such prior notice
shall not be required upon the occurrence and during the continuance of an Event
of Default), from time to time during Borrower's usual business hours, so long
as Borrower's normal business operations are not unreasonably disrupted, to
inspect Borrower's Books and to make copies thereof and to check, test, audit
and appraise the Collateral in order to verify Borrower's financial condition or
the amount, condition of, or any other matter relating to, the Collateral,
including Borrower's Accounts.
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4.4 Single Loan. All of the Obligations of Borrower to
Servicing Agent or Lenders arising under or in connection with this Agreement,
or any of the Loan Documents, shall constitute one general obligation of
Borrower and shall be secured by all of the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary of Borrower is a corporation duly existing and in good standing under
the laws of its state of incorporation and qualified and licensed to do business
in, and is in good standing in, any state in which the conduct of its business
or its ownership of property requires that it be so qualified, except for states
as to which failure to so qualify would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or By-laws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
Except as disclosed in the Schedule, Borrower has not acquired any part of the
Collateral from an assignor outside the ordinary course of such assignor's
business.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are
bona fide existing obligations. The service or property giving rise to such
Eligible Accounts has been performed or delivered to the account debtor or to
the account debtor's agent for immediate shipment to and unconditional
acceptance by the account debtor. Borrower has not received notice of actual or
imminent Insolvency Proceeding of any account debtor whose Accounts are included
in any Borrowing Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all
material respects of good and marketable quality, free from all material
defects.
5.6 Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business and will not without
at least thirty (30) days prior written notice to Servicing Agent do business
under any name other than that specified on the signature page hereof or in the
Schedule. The chief executive office of Borrower is located at the address
indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule,
there are no actions or proceedings pending, or, to Borrower's knowledge,
threatened by or against Borrower or any
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Subsidiary of Borrower before any court or administrative agency in which an
adverse decision could result in damages or costs to Borrower of One Million and
No/100 Dollars ($1,000,000.00) or more or have a Material Adverse Effect.
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary of
Borrower that have been delivered by Borrower to Servicing Agent or any Lender
fairly present in all material respects Borrower's consolidated financial
condition as of the date thereof and Borrower's consolidated results of
operations for the period then ended. There has not been a material adverse
change in the consolidated financial condition of Borrower since the date of the
most recent of such financial statements submitted to Lenders or Servicing Agent
on or about the Closing Date.
5.9 Solvency. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary of
Borrower has met the minimum funding requirements of ERISA with respect to any
employee benefit plans subject to ERISA. No event has occurred resulting from
Borrower's or any of its Subsidiary's failure to comply with ERISA that is
reasonably likely to result in Borrower's or any such Subsidiary's incurring any
liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower and each of its Subsidiaries have complied with all
the provisions of the Federal Fair Labor Standards Act, the noncompliance with
which would cause a Material Adverse Effect. Neither Borrower nor any of its
Subsidiaries has violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any of its
Subsidiary's properties or assets has ever been used by Borrower or any such
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's nor
any of its Subsidiary's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
hazardous waste or hazardous substance disposal site, or a candidate for closure
pursuant to any environmental protection statute; no lien, resulting in a
Material Adverse Effect, arising under any environmental protection statute has
attached to any revenues or to any real or personal property owned by Borrower
or any Subsidiary of Borrower; and neither Borrower nor any of its Subsidiaries
has received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal, state or other governmental agency
concerning any action or omission by Borrower or any Subsidiary of Borrower
resulting in the release, or other disposition of hazardous waste or hazardous
substances into the environment.
5.12 Taxes. Borrower and each Subsidiary of Borrower has filed
or caused to be filed all tax returns required to be filed on a timely basis
except where failure to do so would not
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reasonably be expected to result in a Material Adverse Effect, and has paid, or
has made adequate provision for the payment of, all taxes reflected therein in
accordance with GAAP.
5.13 Subsidiaries. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.14 Government Consents. Borrower and each Subsidiary of
Borrower has obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's and
each such Subsidiary's business as currently conducted, the failure of which to
obtain would have a Material Adverse Effect on Borrower's financial condition,
operations or business.
5.15 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Servicing Agent or any Lender contains any untrue statement of a fact or omits
to state a fact necessary in order to make the statements contained in such
certificates or statements not misleading, except which would not result in a
Material Adverse Effect.
5.16 Intellectual Property. Borrower is the sole owner of the
Intellectual Property Collateral, except for non-exclusive licenses granted by
Borrower to its customers in the ordinary course of business. To the best of
Borrower's knowledge, each of the Patents is valid and enforceable, and no part
of the Intellectual Property Collateral has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property Collateral violates the rights of any third party
other than as disclosed on the Schedule. Except for and upon the filing with the
United States Patent and Trademark Office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights and
Mask Works necessary to perfect the security interests created hereunder and
under the Intellectual Property Security Agreement of even date herewith, and
except as has been already made or obtained, no authorization, approval or other
action by, and no notice to or filing with, any United States governmental
authority or United States regulatory body is required either (i) for the grant
by Borrower of the security interest granted hereby and in the Loan Documents or
for the execution, delivery or performance of Loan Documents by Borrower in the
United States or (ii) for the perfection in the United States or the exercise by
Servicing Agent and Lenders of their rights and remedies hereunder.
5.17 No Subordinated Debt. No Subordinate Debt is outstanding
hereunder, nor has any Subordinated Debt been previously approved by Required
Lenders, as of the date hereof.
5.18 Year 2000 Reprogramming. Any reprogramming required to
permit the proper functioning in and following the year 2000, of the Borrower's
and its Subsidiaries' material (a) computer systems and (b) equipment containing
embedded microchips (including systems and equipment supplied by others or with
which the Borrower's or any of its Subsidiaries' systems interface), the failure
of which to have completed could reasonably be expected to result in a Material
Adverse Effect, and the testing of all such systems and equipment as so
reprogrammed, will be substantially completed by September 30, 1999. The cost to
the Borrower and its Subsidiaries of such reprogramming and testing of the
reasonably foreseeable consequences of year 2000 to the
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Borrower and its Subsidiaries (including, without limitation, reprogramming
errors and the failure of others' systems or equipment) will not result in an
Event of Default or a Material Adverse Effect. Except for such of the
reprogramming referred to in the preceding sentence as may be necessary, the
computer and management information systems of the Borrower and its Subsidiaries
are and, with ordinary course upgrading and maintenance, will continue to be,
sufficient to permit the Borrower and its Subsidiaries to conduct its business
without any Material Adverse Effect.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Lenders may have any Commitment
to make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain in force, to the
extent consistent with prudent management of Borrower's business, all licenses,
approvals and agreements, the loss of which could have a Material Adverse
Effect. Notwithstanding the foregoing, (a) Borrower may dissolve a Subsidiary of
Borrower so long as the assets of the Subsidiary remain with Borrower or a
wholly-owned Subsidiary of Borrower; and (b) any wholly-owned Subsidiary of
Borrower may merge or consolidate with another wholly-owned Subsidiary of
Borrower; and (c) any wholly-owned Subsidiary of Borrower may merge or
consolidate with Borrower so long as Borrower is the surviving corporation.
6.2 Government Compliance. Borrower shall meet, and shall
cause each Subsidiary of Borrower to meet, the minimum funding requirements of
ERISA with respect to any employee benefit plans subject to ERISA. Borrower
shall comply, and shall cause each Subsidiary of Borrower to comply, with all
statutes, laws, ordinances and government rules and regulations to which it is
subject, noncompliance with which could have a Material Adverse Effect.
6.3 Financial Statements, Reports, Certificates. Borrower
shall deliver to Servicing Agent and each of the Lenders then holding not less
than one-third of the total Commitment of the Lenders: (a) as soon as available,
but in any event within twenty (20) days after the end of each month (other than
the final month of Borrower's applicable fiscal year), a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during such period (with each of such financial statements as of the
end of any fiscal quarter of Borrower also being in consolidating format), in a
form and certified by a Responsible Officer of Borrower; (b) as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, audited consolidated and consolidating financial statements of
Borrower prepared in accordance with GAAP, consistently applied, together with
an unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Servicing Agent and Requisite
Lenders; (c) within five (5) days of filing or sending for delivery, as
applicable, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission; (d) immediately upon receipt of notice thereof, a report of
any
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legal actions pending or threatened against Borrower or any Subsidiary that
could reasonably be expected to result in damages or costs to Borrower or any
Subsidiary of One Million and No/100 Dollars ($1,000,000.00) or more; (e) such
budgets, sales projections, operating plans or other financial information as
Servicing Agent or any Lender may reasonably request from time to time, and (f)
prompt notice of any material change in the composition of the Intellectual
Property Collateral, including, but not limited to, any subsequent ownership
right of the Borrower in or to any Copyright, Patent or Trademark not specified
in any intellectual property security agreement between Borrower and Servicing
Agent or knowledge of an event that could reasonably be expected to materially
adversely effects the value of the Intellectual Property Collateral.
Within twenty (20) days after the last day of each month, Borrower
shall deliver to Servicing Agent and each Lender then holding not less than
one-third of the total Commitments of the Lenders a Borrowing Base Certificate
signed by a Responsible Officer in substantially the form of Exhibit C hereto,
together with aged listings of accounts receivable and accounts payable and,
with the monthly financial statements, a Compliance Certificate signed by a
Responsible Officer in substantially the form of Exhibit D hereto.
6.4 Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects other than those
which would not result in a Material Adverse Effect or for which adequate
reserves have been provided for in accordance with GAAP. Returns and allowances,
if any, as between Borrower and its account debtors shall be on the same basis
and in accordance with the usual customary practices of Borrower so long as in
accordance with GAAP. Borrower shall promptly notify Servicing Agent of all
returns and recoveries and of all disputes and claims, where the return,
recovery, dispute or claim, together with all other such outstanding returns,
recoveries, disputes or claims, involves more than One Million and No/100
Dollars ($1,000,000.00) in the aggregate; provided, however, that such One
Million and No/100 Dollars ($1,000,000.00) threshold amount shall be
automatically reduced by the amount of any such outstanding returns, recoveries,
disputes or claims for which no dollar for dollar GAAP reserves have been
established by Borrower.
6.5 Taxes. Borrower shall make, and shall cause each
Subsidiary of Borrower to make, due and timely payment or deposit of all
material federal, state, and local taxes, assessments, or contributions required
of it by law, and will execute and deliver to Servicing Agent, on demand if an
Event of Default has occurred and is continuing, appropriate certificates
attesting to the payment or deposit thereof (provided that Borrower shall
confirm such payment in connection with any compliance certificates regularly
submitted hereunder); and Borrower will make, and will cause each Subsidiary of
Borrower to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request if an Event of Default
has occurred and is continuing, furnish Servicing Agent with proof satisfactory
to Servicing Agent and Lenders indicating that Borrower and Subsidiary of
Borrower has made such payments or deposits; provided that Borrower or a
Subsidiary of Borrower need not make any payment if the amount or validity of
such payment does not result in a Material Adverse Effect or is (i) contested in
good faith by appropriate proceedings and (ii) is reserved against (to the
extent required by GAAP) by Borrower.
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6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as are reasonably satisfactory to
Servicing Agent and Requisite Lenders. All such policies of insurance shall
contain a lenders loss payable endorsement, in a form satisfactory to Servicing
Agent and Requisite Lenders, showing Servicing Agent as an additional loss payee
thereof and all liability insurance policies shall specify that the insurer must
give at least fifteen (15) days notice to Servicing Agent before canceling its
policy for any reason. At Servicing Agent's or Requisite Lenders' request,
Borrower shall deliver to Servicing Agent and each Lender certified copies of
such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Servicing Agent and Requisite Lenders, be applied on account of the Obligations,
unless the proceeds are payable for any damage or loss other than to Inventory,
in which case, such proceeds shall be applied to replace such damaged or lost
Inventory prior to the occurrence and continuance of an Event of Default or
applied against the Obligations after the occurrence and during the continuance
of an Event of Default.
6.7 Quick Ratio. Borrower shall maintain, as of the last day
of the fiscal quarter ending April 30, 1999 and the fiscal quarter ending July
31, 1999, a ratio of Quick Assets to Current Liabilities, less the then current
portion of deferred maintenance revenue, of at least 1.30 to 1.0. Borrower shall
maintain, as of the last day of the fiscal quarter ending October 31, 1999, a
ratio of Quick Assets to Current Liabilities, less the then current portion of
deferred maintenance revenue, of at least 1.40 to 1.0. Commencing with the
fiscal quarter ending January 31, 2000 and for each fiscal quarter thereafter,
Borrower shall maintain a ratio of Quick Assets to Current Liabilities, less the
then current portion of deferred maintenance revenue, of at least 1.50 to 1.0.
Borrower shall maintain, as of the last day of each calendar month, a ratio of
Quick Assets to Current Liabilities less the then current portion of deferred
maintenance revenue of at least 1.0 to 1.0. The ratio calculation required by
this paragraph shall be calculated for Borrower and its Subsidiaries on a
consolidated basis.
6.8 Debt-Tangible Net Worth Ratio. Borrower shall maintain, as
of the last day of each fiscal quarter, a ratio of Total Liabilities, less
deferred maintenance revenue, to Tangible Net Worth plus Subordinated Debt of
not more than 1.0 to 1.0. The ratio calculation required by this paragraph shall
be calculated for Borrower and its Subsidiaries on a consolidated basis.
6.9 Tangible Net Worth. Borrower shall maintain, as of the
last day of each fiscal quarter, a Tangible Net Worth of not less than
Forty-Eight Million and No/100 Dollars ($48,000,000.00), plus fifty percent
(50%) of all year-to-date Net Income (without regard to net losses), through the
last day of the applicable fiscal quarter. Notwithstanding Borrower's Net
Income, Borrower shall maintain a Tangible Net Worth of not less than Fifty
Million and No/100
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Dollars ($50,000,000.00) by July 31, 2000. The Tangible Net Worth calculation
required by this paragraph shall be determined for Borrower and its Subsidiaries
on a consolidated basis.
6.10 Profitability. Borrower shall have a positive Net Income
for each completed fiscal quarter; provided, Borrower may have (i) an aggregate
loss for the quarter ending April 30, 1999 not exceeding Five Million Three
Hundred Thousand and No/100 Dollars ($5,300,000.00) and (ii) a quarterly loss
for the following fiscal quarters not exceeding the following amounts for the
corresponding quarter:
Quarter Ending Maximum Quarterly Loss
-------------- ----------------------
April 30, 1999 $1,500,000.00
July 31, 1999 $1,000,000.00
October 31, 1999 $ 300,000.00
For purposes of calculating the One Million Five Hundred Thousand and No/100
Dollars ($1,500,000.00) loss allowed under subparagraph (ii) for Borrower's
fiscal quarter ending April 30, 1999 only, the calculation of Net Income shall
not include any costs or expenses of any kind or nature incurred in connection
with the acquisition by Borrower of substantially all of the assets of Vosaic,
L.L.C. The Net Income calculation required by this Section 6.10 shall be
calculated for Borrower and its Subsidiaries on a consolidated basis.
6.11 Registration of Intellectual Property Rights.
(a) Within thirty (30) days of the date of this
Agreement, Borrower shall register or cause to be registered (to the extent not
already registered) with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those intellectual property
rights listed on Exhibits A, B, C and D to the Intellectual Property Security
Agreement delivered to Servicing Agent by Borrower in connection with this
Agreement. To the extent commercially reasonable and consistent with Borrower's
past practices, Borrower shall register or cause to be registered with the
United States Patent and Trademark Office or the United States Copyright Office,
as applicable, those additional, material intellectual property rights developed
or acquired by Borrower from time to time in connection with any product prior
to the sale or licensing of such product to any third party, including without
limitation revisions or additions to the intellectual property rights listed on
such Exhibits A, B, C and D.
(b) Borrower shall execute and deliver such
additional instruments and documents from time to time as Servicing Agent or
Requisite Lenders shall reasonably request to perfect Servicing Agent's security
interest in the Intellectual Property Collateral.
(c) Borrower shall (i) use commercially reason-
able efforts to protect, defend and maintain the validity and enforceability of
the material Trademarks, Patents, Copyrights, and Mask Works, (ii) use
commercially reasonable efforts to detect infringements of the Trademarks,
Patents, Copyrights and Mask Works and promptly advise Servicing Agent and each
Lender in writing of material infringements detected and (iii) not allow any
material Trademarks, Patents, Copyrights, or Mask Works to be abandoned,
forfeited or dedicated to the public without the written consent of Servicing
Agent and Requisite Lenders, which shall not be unreasonably withheld, unless
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Servicing Agent or Requisite Lenders determines that reasonable business
practices suggest that abandonment is appropriate.
(d) Servicing Agent or Requisite Lenders shall
have the right, but not the obligation, to take, at Borrower's sole expense, any
actions that Borrower is required under this Section 6.11 to take but which
Borrower fails to take, after fifteen (15) days notice to Borrower. Borrower
shall reimburse and indemnify Servicing Agent and each Lender for all reasonable
costs and reasonable expenses incurred in the reasonable exercise of its rights
under this Section 6.11.
6.12 Lockbox Account. Borrower shall immediately establish a
lockbox account ("Lockbox Account") with a Lender or another entity selected by
Servicing Agent and each Lender in their reasonable discretion for the payment
of Borrower's Accounts, including, without limitation, directing all account
debtors of Borrower to deposit payments due to Borrower into the Lockbox
Account. Borrower shall deposit into the Lockbox Account any Account proceeds
which Borrower receives through any other means; provided, however, that prior
to the occurrence and continuance of an Event of Default, Borrower shall not be
required to deposit into the Lockbox Account any payments received by Borrower
if the aggregate amount of such payments received during any Business Day does
not exceed Ten Thousand and No/100 Dollars ($10,000.00). Upon request of
Servicing Agent or any Lender, Borrower shall furnish such party with (a)
satisfactory evidence that Borrower has notified and directed all of its account
debtors to make payments of Borrower's Accounts to the Lockbox Account and (b) a
list of all of Borrower's account debtors and their respective current
addresses.
6.13 ERISA. At all times Borrower shall: (a) make
contributions to each Plan in a timely manner and in an amount sufficient to
comply with the minimum funding standard requirements of ERISA; (b) immediately
upon acquiring knowledge of (i) any Reportable Event in connection with any Plan
for which no administrative or statutory exemption exists or (ii) any
"prohibited transaction," as such term is defined in Section 4975 of the IRC in
connection with any Plan, that could reasonably be expected to result in the
imposition of material damages or a material excise tax on the Borrower or any
Subsidiary thereof, furnish the Servicing Agent a statement executed by a
Responsible Officer of the Borrower or such Subsidiary setting forth the details
thereof and the action which the Borrower or any such Subsidiary proposes to
take with respect thereto and, when known, any action taken by the Internal
Revenue Service with respect thereto; (c) notify the Servicing Agent promptly
upon receipt by the Borrower or any Subsidiary thereof of any notice of the
institution of any proceedings or other actions which may reasonably be expected
to result in the termination of any Plan by the PBGC and furnish the Servicing
Agent with copies of such notice; (d) pay when due, or within any applicable
grace period allowed by the PBGC, all required premium payments to the PBGC; (e)
furnish the Servicing Agent with copies of the annual report for each Plan filed
with the Internal Revenue Service not later than ten (10) days after the
Servicing Agent requests such report; (f) furnish the Servicing Agent with
copies of any request for waiver of the funding standards or extension of the
amortization periods required by Sections 303 and 304 of ERISA or Section 412 of
the IRC promptly after the request is submitted to the Secretary of the
Treasury, the Department of Labor or the Internal Revenue Service, as the case
may be; and (g) pay when due all installment contributions required under
Section 302 of ERISA or Section 412 of the IRC or within 10 days of a failure to
make any such required contributions when due furnish the Servicing Agent with
written notice of such failure.
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6.14 Year 2000 Compliance. Borrower shall complete and furnish
such reasonable questionnaires and submit to any additional due diligence
reasonably required by the Servicing Agent or any Lender in order to confirm
that the representations and warranties set forth in Section 5.18 hereof are
true and correct in all material respects.
6.15 Notice of Events. Borrower shall notify the Servicing
Agent and each Lender immediately upon acquiring knowledge of the occurrence of,
or if the Borrower or any of its Subsidiaries causes or intends to cause, as the
case may be, any of the following: (a) the institution of any lawsuit,
administrative proceeding or investigation affecting the Borrower or any of its
Subsidiaries, including without limitation, any audit by the Internal Revenue
Service, the adverse determination under which could reasonably be expected to
have a Material Adverse Effect; (b) any development or change in the business or
affairs of the Borrower or any of its Subsidiaries' which has had or which is
reasonably likely to have a Material Adverse Effect; (c) any Event of Default,
together with a detailed statement by a Responsible Officer on behalf of the
Borrower of the steps being taken to cure such Event of Default; (d) the
occurrence of any default by the Borrower or any of its Subsidiaries under any
agreement or series of related agreements to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect; and (e) any
violation by, or investigation of any Borrower or any of its Subsidiaries in
connection with any actual or alleged violation of any legal requirement imposed
by the Environmental Protection Agency, the Occupational Safety Hazard
Administration or any other Governmental Authority which has or is reasonably
likely to have a Material Adverse Effect.
6.16 Further Assurances. At any time and from time to time,
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Servicing Agent or any Lender
to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit
Extension hereunder shall be available and until payment in full of the
outstanding Obligations or for so long as Lenders may have any commitment to
make any Credit Extensions, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer, pledge,
encumber, assign or otherwise dispose of (collectively, a "Transfer"), or permit
any of its Subsidiaries to Transfer, all or any part of its business or property
(including without limitation, stock held in any Subsidiary), other than
Transfers: (i) of inventory in the ordinary course of business, (ii) of
non-exclusive licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries in the ordinary course of business; (iii) that
constitute payment of normal and usual operating expenses in the ordinary course
of business; (iv) of worn-out or obsolete Equipment; (v) of excess Equipment, if
sold for the greater of book or market value, so long as the aggregate amount of
such excess Equipment sold in any fiscal year does not exceed Five Hundred
Thousand and No/100 Dollars ($500,000.00); (vi) of interests in that agreement
entitled "Wild Basin Net Proceeds Agreement" dated March 11, 1998 and that
agreement entitled "Waterford: Memorandum of Net Profits Agreement" dated June
15, 1994; (vii) any capital stock held by Borrower in Accord Video
Telecommunications Ltd., if sold for not less than its book value; and (viii)
the factoring or sale by any of Borrower's Subsidiaries whose principal place of
business is located outside the United States of such Subsidiary's accounts
arising out of the sale or lease of goods. Notwithstanding the foregoing,
Borrower may enter into one or
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more sale leaseback transactions so long as no Event of Default exists or would
exist after giving effect to such action and so long as the total fair market
value or book value, whichever is greater, of the assets so Transferred,
together with other capital leases incurred after the date hereof, does not
exceed the amount of capital lease obligations permitted under the definition of
"Permitted Indebtedness".
7.2 Changes in Business, Ownership, Management, or Chief
Executive Office. Engage in any business, or permit any of its Subsidiaries to
engage in any business, other than the businesses currently engaged in by
Borrower and any business substantially similar or related thereto (or
incidental thereto). Borrower will not, without at least thirty (30) days prior
written notification to Servicing Agent, relocate its chief executive office or
add or relocate any business location where Borrower maintains Inventory with a
value equal to or greater than Two Million Five Hundred Thousand and No/100
Dollars ($2,500,000.00).
7.3 Mergers or Acquisitions. Except for Borrower's acquisition
of substantially all of the assets of Vosaic, L.L.C. (such acquisition hereby
being consented to by the Servicing Agent and the Lenders), merge or
consolidate, or permit any of its Subsidiaries to merge or consolidate, with or
into any other business organization, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person if (i) an Event of Default has occurred and is
continuing or would exist after giving effect to such action or (ii) in
connection with such action, the total Indebtedness incurred by Borrower
(limited to assumption by Borrower of accounts payable of the acquired party)
and cash paid by Borrower in connection with all such action after the date of
this Agreement totals more than One Million Five Hundred Thousand and No/100
Dollars ($1,500,000.00) or (iii) such action dilutes what would have been
Borrower's earnings for the fiscal quarter in which such action occurs, if not
for such action.
7.4 Indebtedness. Subject to Section 7.3, create, incur,
assume or be or remain liable with respect to any Indebtedness, or permit any
Subsidiary of Borrower so to do, other than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of the Collateral, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock of Borrower.
7.7 Investments. Directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction (exclusive of any employment
arrangements with the officers of Borrower and exclusive of any of Borrower's
benefit or compensation programs for officers and directors) with any Affiliate
of Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less favorable
to Borrower than would be obtained in an arm's length transaction with a
nonaffiliated Person.
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7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except to the extent such payment is allowed under any Subordination Agreement
entered into with Servicing Agent and Lenders covering such Subordinated Debt,
or amend any provision contained in any documentation relating to the
Subordinated Debt if such amendment would adversely affect the interests of
Lenders.
7.10 Inventory. Store any Inventory with a bailee,
warehouseman, or similar party unless Servicing Agent has received a pledge of
any warehouse receipt covering such Inventory and a subordination or waiver of
any warehouseman's or other similar Lien held by such party against the
applicable Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Servicing Agent and Lenders may
approve in writing, Borrower shall keep the Inventory only at the locations set
forth in the Schedule and such other locations of which Borrower gives Servicing
Agent and Lenders prior written notice and as to which Borrower signs and files
a financing statement where needed to perfect Servicing Agent's security
interest.
7.11 Compliance. Become an "investment company" or a company
controlled by an "investment company", within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose; fail to meet the minimum funding requirements of ERISA; permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Servicing Agent's Lien on
the Collateral; or permit any of its Subsidiaries to do any of the foregoing.
7.12 Intellectual Property Agreement. Permit the inclusion in
any material contract to which it becomes a party of any provisions that could
reasonably be expected to in any way prevent the creation of a security interest
in Borrower's rights and interests in any property included within the
definition of the Intellectual Property Collateral acquired under such
contracts.
7.13 Foreign Assets. Permit the aggregate assets of Borrower
at any time not located within the United States, including without limitation,
all Investments by Borrower in any of its Subsidiaries who does not have its
principal place of business in the United States, to exceed fifteen percent
(15%) of Borrower's total assets as of the date of such determination.
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7.14 ERISA Compliance.
(a) At any time engage in any "prohibited trans-
action" as defined in ERISA; or permit any Plan to be terminated in a manner
which could result in the imposition of a Lien on any property of the Borrower
or any of its Subsidiaries pursuant to ERISA.
(b) Engage in any transaction in connection with
which the Borrower or any Subsidiary thereof could reasonably be expected to be
subject to either a material civil penalty assessed pursuant to the provisions
of Section 502 of ERISA or a material tax imposed under the provisions of
Section 4975 of the IRC.
(c) Terminate any Plan in a "distress termi-
nation" under Section 4041 of ERISA, or take any other action which could
reasonably be expected to result in a material liability of the Borrower or any
Subsidiary thereof to the PBGC.
(d) Fail to make payment when due of all amounts
which, under the provisions of any Plan, the Borrower or any Subsidiary thereof
is required to pay as contributions thereto, or, with respect to any Plan,
permit to exist any material "accumulated funding deficiency" (within the
meaning of Section 302 of ERISA and Section 412 of the IRC), whether or not
waived, with respect thereto.
(e) Adopt an amendment to any Plan requiring the
provision of security under Section 307 of ERISA or Section 401(a)(29) of the
IRC.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, within five (5)
calendar days of when due, any of the Obligations.
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation
under Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement; provided however, Borrower
shall have the following specific grace periods: (i) with respect to Form 10-Q
reports to be provided under Section 6.3 above, five (5) days grace, (ii) with
respect to Form 10-K reports to be provided under Section 6.3 above, fifteen
(15) days grace, and (iii) with respect to proof of insurance or insurance
policies required to be provided under Section 6.6 above, fifteen (15) days
grace, or
(b) If Borrower fails or neglects to perform,
keep, or observe any other material term, provision, condition, covenant, or
agreement contained in this Agreement, in any of the Loan Documents, or in any
other present or future agreement between Borrower, Lenders and Servicing Agent
related to this Agreement and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within thirty (30)
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days after the occurrence thereof (provided that no Credit Extensions will be
required to be made during such cure period).
8.3 Material Adverse Change. If there (i) occurs a Material
Adverse Effect, or (ii) is a material impairment of the value or priority of
Servicing Agent's security interest in the Collateral.
8.4 Attachment. If any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within thirty (30) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within thirty (30)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period).
8.5 Insolvency. If an Insolvency Proceeding is commenced by
Borrower or if an Insolvency Proceeding is commenced against Borrower (in either
case, an "Insolvency Default") and such Insolvency Proceeding commenced against
Borrower is not dismissed or stayed within forty-five (45) days (provided that
no Advances or Credit Extensions will be made prior to the dismissal of such
Insolvency Proceeding).
8.6 Other Agreements. If there is a default in any agreement
to which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Million and No/100
Dollars ($1,000,000) or that could have a Material Adverse Effect.
8.7 Subordinated Debt. Borrower or any Subsidiary makes
any payment in respect of Subordinated Debt, except as permitted by Section 7.9
above.
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Million
and No/100 Dollars ($1,000,000.00) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of thirty (30) days (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgments, and if the aggregate amount of such unsatisfied, but stayed judgments
ever exceeds Two Million and No/100 Dollars ($2,000,000.00) in the aggregate,
then no Credit Extensions will be made unless and until the aggregate amount of
such unsatisfied, but stayed judgments are reduced to Two Million and No/100
Dollars ($2,000,000.00) or less).
8.9 Misrepresentations. If any material misrepresenta-
tion or material misstatement exists now or hereafter in any warranty,
representation, statement or report set forth herein or made
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to Servicing Agent or any Lender by Borrower or any officer or director of
Borrower pursuant to this Agreement.
8.10 ERISA. Any of the following shall occur: (1) a Reportable
Event shall have occurred with respect to a Plan; (2) the filing by the
Borrower, any ERISA Affiliate, or an administrator of any Plan of a notice of
intent to terminate such Plan in a "distressed termination" under the provisions
of Section 4041 of ERISA; (3) the receipt of notice by the Borrower, any ERISA
Affiliate or an administrator of a Plan that the PBGC has instituted proceedings
to terminate (or appoint a trustee to administer) such a Plan; (4) and other
event or condition exists which might, in the opinion of the Servicing Agent,
constitute grounds under the provisions of Section 4042 of ERISA for the
termination of or the appointment of a trustee to administer any Plan by the
PBGC; (5) a Plan shall fail to maintain a minimum funding standard required by
Section 412 of the IRC for any plan year or a waiver of standard is sought or
granted under the provisions of Section 412(d) of the IRC; (6) the Borrower or
any ERISA Affiliate has incurred, or is reasonably likely to incur, a liability
under the provisions of Section 4062, 4036, 4046 or 4201 of ERISA; (7) the
Borrower or any ERISA Affiliate fails to pay the full amount of an installment
required under Section 412(m) of the IRC; or (8) the occurrence of any other
event or condition with respect to any Plan which would constitute an event of
default or default under any other agreement entered into by the Borrower or any
ERISA Affiliate.
9. SERVICING AGENT'S AND LENDERS' RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Servicing Agent may, at its election, or
shall, upon request of Requisite Lenders, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Servicing Agent or Lenders);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other agreement
between or among Borrower or Servicing Agent or any Lender;
(c) With the continuation of an Event of Default
for sixty (60) days or more, settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Servicing
Agent, with the approval of Requisite Lenders, reasonably considers advisable;
(d) Without notice to or demand upon Borrower,
make such payments and do such acts as Servicing Agent or Requisite Lenders in
good faith consider necessary or reasonable to protect Servicing Agent's
security interest in the Collateral. Borrower agrees to assemble the Collateral
if Servicing Agent or Requisite Lenders so require, and to make the Collateral
available to Servicing Agent as Servicing Agent or Requisite Lenders may
designate. Borrower authorizes Servicing Agent, on behalf of each Lender, to
enter the premises where the Collateral is located, to
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take and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in the
Requisite Lenders' reasonable determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Servicing
Agent, on behalf of and for the benefit of Lenders, a license to enter such
premises and to occupy the same, without charge, in order to exercise any of
Lenders' rights or remedies provided herein, at law, in equity or otherwise;
(e) Without notice to Borrower, set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by any
Lender or Servicing Agent, or (ii) indebtedness at any time owing to or for the
credit or the account of Borrower owed or owing by any Lender or Servicing
Agent;
(f) Ship, reclaim, recover, store, finish, main-
tain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Servicing Agent is hereby granted a
non-exclusive, royalty-free license or other right, solely pursuant to the
provisions of this Section 9.1, to use, without charge, Borrower's labels,
Patents, Copyrights, Mask Works, rights of use of any name, trade secrets, trade
names, Trademarks, service marks, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with
Servicing Agent's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Servicing
Agent's benefit;
(g) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Servicing Agent determines is commercially reasonable, and apply the proceeds
thereof to the Obligations in whatever manner or order it deems appropriate;
(h) Servicing Agent, on behalf of all Lenders,
may credit bid and purchase at any public sale, or at any private sale as
permitted by law; and
(i) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Servicing Agent on behalf of and for the benefit of Lenders (and any of
Servicing Agent's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) endorse Borrower's name on any checks or other forms of
payment or security that may come into Servicing Agent's or Lenders' possession
relating to the Collateral or any part thereof; (b) sign Borrower's name on any
invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (c) make, settle, and adjust all claims under and
decisions with respect to Borrower's policies of insurance relating to the
Collateral or any part thereof; (d) settle and adjust disputes and claims
respecting the Accounts directly with account debtors, for amounts and upon
terms which Servicing Agent or Lenders determines to be reasonable; (e) modify,
in its sole discretion, any intellectual property security agreement entered
into between Borrower and Servicing Agent, without first obtaining Borrower's
approval of or signature to such
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modification, for the sole purpose of amending Exhibit A, Exhibit B, Exhibit C,
and Exhibit D, thereof, as appropriate, to include reference to any right, title
or interest in any Copyrights, Patents, Trademarks or Mask Works acquired by
Borrower after the execution hereof or deleting any reference to any right,
title or interest in any Copyrights, Patents, Trademarks, or Mask Works in which
Borrower no longer has or claims any right, title or interest; (f) transfer the
Intellectual Property Collateral into the name of Servicing Agent or a third
party to the extent permitted under the Code; and (g) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and provided Servicing Agent may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Servicing Agent as Borrower's attorney in fact, and each and
every one of Servicing Agent's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully repaid and
performed and Lenders' obligation to provide Credit Extensions hereunder is
terminated.
9.3 Accounts Collection. Upon the occurrence and during the
continuance of an Event of Default, Servicing Agent may notify any Person owing
funds to Borrower of Servicing Agent's security interest in such funds. Borrower
shall collect all amounts owing to Borrower on behalf of Servicing Agent,
receive in trust all payments as Servicing Agent's and Lenders' trustee, and if
required by Section 6.12, immediately deliver such payments to Servicing Agent
in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Lenders' Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Servicing Agent or Requisite
Lenders may do any or all of the following: (a) make payment of the same or any
part thereof; (b) set up such reserves under the Committed Revolving Line as
Servicing Agent or Requisite Lenders deems necessary to protect Lenders from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as such Lender deems prudent. Any amounts so paid or
deposited by Servicing Agent or any Lender shall constitute Lenders' Expenses,
shall be immediately due and payable, and shall bear interest at the then
applicable rate hereinabove provided, and shall be secured by the Collateral.
Any payments made by any Lender or Servicing Agent shall not constitute an
agreement by such Lender or Servicing Agent to make similar payments in the
future or a waiver by such Lender or Servicing Agent of any Event of Default
under this Agreement.
9.5 Lenders' Liability for Collateral. So long as Lenders
comply with reasonable banking practices, no Lender shall in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever
other than such losses, costs, expenses or liabilities based upon or arising out
of the gross negligence or willful misconduct of the Servicing Agent or such
Lender. All risk of loss, damage or destruction of the Collateral shall be borne
by Borrower.
9.6 Remedies Cumulative. Lenders' rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Lenders shall have all other rights
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and remedies, not expressly set forth herein, and as provided under the Code, by
law, or in equity. No exercise by Lenders of one right or remedy shall be deemed
an election, and no waiver by Lenders of any Event of Default on Borrower's part
shall be deemed a continuing waiver. No delay by Lenders shall constitute a
waiver, election, or acquiescence by it. No waiver by Lenders shall be effective
unless made in a written document signed by all Lenders and Servicing Agent and
then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, notice of intent to accelerate, notice of acceleration,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Lenders or Servicing Agent on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by facsimile to Borrower or Lenders or Servicing Agent, as the
case may be, at its addresses set forth below:
If to Borrower: VTEL Corporation
108 Wild Basin Road
Austin, Texas 78746
Attn: Ms. Dianne Johnson, Treasurer
Fax: 512/437-2718
If to Servicing Agent: Silicon Valley Bank
9020 Capital of Texas Highway North
Building 1, Suite 350
Austin, Texas 78759
Attn: Mr. J. Doug Mangum, Senior Vice President
Fax: 512/794-0855
If to SVB: Silicon Valley Bank
9020 Capital of Texas Highway North
Building 1, Suite 350
Austin, Texas 78759
Attn: Mr. J. Doug Mangum, Senior Vice President
Fax: 512/794-0855
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If to Comerica: Comerica Bank-Texas
1601 Elm Street
Dallas, Texas 75201
P.O. Box 650282
Dallas, Texas 75265-0282
Attn: Mr. Gary Orr, Chief Credit Officer
with a copy to: Comerica Bank-Texas
804 Congress Ave., Suite 320
Austin, Texas 78701
Attn: Ms. Robin Ingari, Senior Vice President
Fax: 512/251-7417
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. NOTICES TO ONE LENDER SHALL NOT BE DEEMED NOTICE TO ANY OTHER LENDER.
11. CHOICE OF LAW AND VENUE
THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW AS IF PERFORMED ENTIRELY WITHIN THE STATE OF
TEXAS BY TEXAS RESIDENTS. EACH OF BORROWER, SERVICING AGENT AND LENDERS HEREBY
SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN
THE COUNTY OF TRAVIS, STATE OF TEXAS.
12. PARTICIPATION
12.1 Participation Interest. Any Lender may at any time sell
to one or more commercial banks or other Persons not Affiliates of Borrower
("Participant") participating interests in any Credit Extensions, the Commitment
of such Lender and the other interests of such Lender ("Original Lender")
hereunder and under the other Loan Documents; provided, however, that (i) the
Original Lender's obligations under this Agreement shall remain unchanged, (ii)
the Original Lender shall remain solely responsible for the performance of such
obligations, (iii) Borrower shall continue to deal solely and directly with the
Original Lender in connection with the Original Lender's rights and obligations
under the Agreement and the other Loan Documents, and (iv) no Lender shall
transfer or grant any participating interest under which the Participant shall
have rights to approve any amendment to, or any consent or waiver with respect
to, this Agreement or any other Loan Document.
12.2 No Obligation. Neither Lender shall have any obligation,
implied or express, to assign, delegate, sell, offer to sell, purchase, offer to
purchase or otherwise transfer in any way to any other party hereunder or any
third party any participating interest hereunder or any or all of the Advances,
the Commitments or the other rights and obligations of such Lender hereunder.
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13. THE SERVICING AGENT
13.1 Appointment, Powers and Immunities.
13.1.1 Each Lender hereby appoints SVB as Servicing
Agent hereunder and under the other Loan Documents and each Lender hereby
irrevocably authorizes Servicing Agent to act hereunder and thereunder as
Servicing Agent of such Lender. Servicing Agent agrees to act as such upon the
express conditions contained in this Section 13. In performing its functions and
duties under this Agreement and under the other Loan Documents, Servicing Agent
shall act solely as Servicing Agent of Lenders and does not assume and shall not
be deemed to have assumed any obligation towards or relationship of agency or
trust with or for Borrower.
13.1.2 Each Lender irrevocably authorizes Servicing
Agent to take such actions on such Lender's behalf and to exercise such powers
hereunder as are specifically delegated to Servicing Agent by the terms hereof,
together with such powers as are reasonably incidental thereto. Servicing Agent
shall have only those duties which are specified in this Agreement and it may
perform such duties by or through its agents, representatives or employees. In
performing its duties hereunder on behalf of Lenders, Servicing Agent shall
exercise the same care which it would exercise in dealing with loans made for
its own account, but it shall not be responsible to any Lender for the
execution, effectiveness, genuineness, validity, enforceability, collectability
or sufficiency of all or any of the Loan Documents, or for any representations,
warranties, recitals or statements made herein or therein or made in any written
or oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents furnished or delivered in connection
herewith or therewith by Servicing Agent to any Lender or by or on behalf of
Borrower to Servicing Agent or any Lender, or be required to ascertain or
inquire as to the performance or observances of any of the terms, conditions,
provisions, covenants or agreements contained herein or therein or as to the use
of the proceeds of the Advances of amounts drawn under the Letters of Credit.
Servicing Agent shall not be responsible for insuring the Collateral or for the
payment of any taxes, assessments, charges or any other charges or liens of any
nature whatsoever upon the Collateral or otherwise for the maintenance of the
Collateral, except in the event Servicing Agent enters into possession of a part
or all of the Collateral, in which event Servicing Agent shall preserve the part
in its possession. Unless the officers of Servicing Agent acting in their
capacity as officers of Servicing Agent on Borrower's account have actual
knowledge thereof or have been notified in writing thereof by Lenders, Servicing
Agent shall not be required to ascertain or inquire as to the existence or
possible existence of any Event of Default. Neither Servicing Agent nor any of
its officers, directors, employees, representatives or agents shall be liable to
Lenders for any action taken or omitted hereunder or under any of the other Loan
Documents or in connection herewith or therewith unless caused by its or their
gross negligence or willful misconduct. No provision of this Agreement or of any
other Loan Document shall be deemed to impose any duty or obligation on
Servicing Agent to perform any act or to exercise any power in any jurisdiction
in which it shall be illegal, or shall be deemed to impose any duty or
obligation on Servicing Agent to perform any act or exercise any right or power
if such performance or exercise (i) would subject Servicing Agent to a tax in a
jurisdiction where it is not then subject to a tax or (ii) would require
Servicing Agent to qualify to do business in any jurisdiction where it presently
is not so qualified. Without prejudice to the generality of the foregoing, no
Lender shall have any right of action whatsoever against Servicing Agent as a
result of Servicing Agent acting or (where so instructed) refraining from acting
under this Agreement or under any of the other Loan Documents in accordance with
the instructions of Lenders. Unless
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otherwise directed by the Requisite Lenders under Section 9.1 or any other
applicable provision of this Agreement, Servicing Agent shall be entitled to
refrain from exercising any power, discretion or authority vested in it under
this Agreement unless and until it has obtained written instructions of any
Lender. The agency hereby created shall in no way impair or affect any of the
rights and powers of, or impose any duties or obligations upon Servicing Agent
in its individual capacity.
13.2 Representations and Warranties: No Responsibility for
Inspection. Each Lender represents and warrants that it has made its own
independent investigation of the financial condition and affairs of Borrower in
connection with the making of the Advances and issuance of the Letters of Credit
hereunder and has made and shall continue to make its own appraisal of the
creditworthiness of Borrower. Servicing Agent shall have no duty or
responsibility either initially or on a continuing basis to make any such
investigation or any such appraisal on behalf of Lenders or to provide any
Lender with any credit or other information (other than information obtained
under the provisions of this Agreement which Servicing Agent shall make
available to each Lender upon request by such Lender) with respect thereto
whether coming into its possession before the date hereof or any times or times
thereafter and shall further have no responsibility with respect to the accuracy
of or the completeness of the information provided to Lenders. With respect to
its participation in the Advances and the Letters of Credit hereunder, Servicing
Agent shall have the same rights and powers hereunder as any other Lender and
may exercise the same rights and powers as though it were not performing the
duties and functions delegated to it hereunder and the term "Lender" or
"Lenders" or any similar term shall unless the context clearly indicates
otherwise include Servicing Agent in its individual capacity. Servicing Agent
and each of its affiliates may accept deposits from, lend money to and generally
engage in any kind of business with Borrower as if it were not Servicing Agent.
13.3 Reliance by Servicing Agent.
13.3.1 Servicing Agent may consult, and any opinion
or legal advice of such counsel who are not employees of Servicing Agent or
Borrower or any Affiliate of Borrower shall be full and complete authorization
and protection in respect of any action taken or suffered by Servicing Agent
hereunder or under any other Loan Documents in accordance therewith. Servicing
Agent shall have the right at any time to seek instructions concerning the
administration of the Collateral from any court of competent jurisdiction.
13.3.2 Servicing Agent may rely, and shall be fully
protected in acting, upon any resolution, statement, certificate, instrument,
opinion, report, notice, request, consent, order, bond or other paper or
document that it has no reason to believe to be other than genuine and to have
been signed or presented by the proper party or parties or, in the case of
cables, telecopies and telexes, to have been sent by the proper party or
parties. In the absence of its gross negligence or willful misconduct, Servicing
Agent may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or opinions
furnished to Servicing Agent and conforming to the requirements of this
Agreement or any of the other Loan Documents.
13.3.3 Except as specifically provided for herein,
Servicing Agent shall not be under any obligation to exercise any of the rights
or powers granted to Servicing Agent by this Agreement and the other Loan
Documents at the request or direction of any Lender unless Servicing
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Agent shall have been provided by such Lender adequate security and indemnity
against the costs, expenses and liabilities that may be incurred by it in
compliance with such request or direction.
13.4 Delegation of Duties. Servicing Agent may execute any of
the powers hereof and perform any duty hereunder either directly or by or
through its agents or attorneys-in-fact. Servicing Agent shall be entitled to
advice of counsel concerning all matters pertaining to such powers and duties.
Servicing Agent shall not be responsible for the negligence or misconduct of any
agents or attorneys-in-fact selected by it without gross negligence or willful
misconduct on the part of Servicing Agent.
13.5 Right to Indemnity. EACH OF LENDERS SEVERALLY, BUT NOT
JOINTLY, AGREES (A) TO INDEMNIFY AND HOLD SERVICING AGENT (AND ANY PERSON ACTING
ON BEHALF OF SERVICING AGENT) HARMLESS FROM AND AGAINST AND (B) PROMPTLY ON
RECEIPT BY EACH LENDER OF SERVICING AGENT'S STATEMENT, TO REIMBURSE SERVICING
AGENT, ACCORDING TO SUCH LENDER'S PRO RATA SHARE OF THE AGGREGATE COMMITMENTS,
TO THE EXTENT SERVICING AGENT SHALL NOT OTHERWISE HAVE BEEN REIMBURSED BY
BORROWER ON ACCOUNT OF AND FOR, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES (INCLUDING,
WITHOUT LIMITATION, THE FEES AND DISBURSEMENTS OF COUNSEL AND OTHER ADVISORS) OR
DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WITH RESPECT TO SERVICING
AGENT'S PERFORMANCE OF ITS DUTIES UNDER THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS; PROVIDED, HOWEVER, THAT NO LENDER SHALL BE LIABLE FOR THE PAYMENT TO
SERVICING AGENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS
RESULTING SOLELY FROM SERVICING AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
SUCH REIMBURSEMENT SHALL NOT IN ANY RESPECT RELEASE BORROWER FROM ANY LIABILITY
OR OBLIGATION. IF ANY INDEMNITY FURNISHED TO SERVICING AGENT FOR ANY PURPOSE
SHALL, IN THE OPINION OF SERVICING AGENT, BE INSUFFICIENT OR BECOME IMPAIRED,
SERVICING AGENT MAY CALL FOR ADDITIONAL INDEMNITY AND CEASE, OR NOT COMMENCE, TO
DO THE ACTS INDEMNIFIED AGAINST UNTIL SUCH ADDITIONAL INDEMNITY IS FURNISHED.
13.6 Resignation and Appointment of Successor Servicing
Agent.
(a) Servicing Agent may resign at any time by
giving thirty (30) days prior written notice thereof to Lenders and Borrower:
provided, however, that the retiring Servicing Agent shall continue to serve
until a successor Servicing Agent shall have been selected and approved pursuant
to this Section 13.6. Upon any such notice, Servicing Agent shall have the right
to appoint a successor Servicing Agent; provided, however, that if such
successor shall not be a Lender under this Agreement, such appointment shall be
subject to the consent of Requisite Lenders. At any time other than during the
existence of an Event of Default, in each case, such appointment shall be
subject to the prior consent of Borrower (such consent to not be unreasonably
withheld, delayed or conditioned).
(b) Servicing Agent agrees at all times to abide
by the terms and conditions of this Agreement and at all times to maintain the
minimum regulatory capital requirements, as set by the Federal Reserve Board,
for an adequately capitalized depository institution, and Servicing Agent
undertakes and agrees to notify each Lender promptly of any failure by Servicing
Agent to
45
<PAGE>
maintain such minimum regulatory capital requirements. If Servicing Agent ever
defaults in the performance of its duties and obligations under this Agreement
and such default remains uncured and continues for more than thirty (30) days
after written notice of such default is given to Servicing Agent by any Lender,
or if Servicing Agent ever allows its regulatory capital requirements to fall
below the minimum regulatory capital requirements for an adequately capitalized
depository institution, any Lender which is not also acting as the Servicing
Agent hereunder may remove such Servicing Agent from acting as Servicing Agent
hereunder and appoint a successor Servicing Agent (which may be the Lender so
removing the Servicing Agent) by delivering written notice thereof to the
Borrower, the Servicing Agent being removed hereunder and any other Lenders, if
any; provided, however, that if such successor Servicing Agent shall not be a
Lender hereunder, such appointment shall be subject to the prior approval of
Borrower (such consent to not be unreasonably withheld, conditioned or delayed),
so long as no Event of Default is then occurring hereunder.
(c) Upon the acceptance of any appointment as an
Servicing Agent hereunder by a successor Servicing Agent, such successor
Servicing Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring or removed Servicing
Agent, and the retiring or removed Servicing Agent shall be discharged from its
duties and obligations under this Agreement. After any retiring or removed
Servicing Agent's resignation or removal hereunder as Servicing Agent, the
provisions of this Section 13 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Servicing Agent under this Agreement.
13.7 Conflicts. SVB and its affiliates may accept deposits
from, lend money to, act as trustee under indentures of, act as merchant banker
in any transaction for, and generally engage in any kind of business with,
Borrower and any person who may do business with or own securities of Borrower,
all as if SVB were not Servicing Agent and without any duty to account therefor
to Lenders or to disclose to Lenders confidential information which SVB may
receive from Borrower in connection with such other activity or business.
13.8 No Obligations of Borrower. Nothing contained in this
Section 13 shall be deemed to impose upon Borrower any obligation in respect of
the due and punctual performance by Servicing Agent of its obligations to
Lenders under any provision of this Agreement, and Borrower shall have no
liability to Servicing Agent or any Lender in respect of any failure by
Servicing Agent or any Lender to perform any of their respective obligations to
each other under this Agreement. Without limiting the generality of the
foregoing sentence, where any provision of this Agreement relating to the
payment of any amounts due and owing under the Loan Documents provides that such
payments shall be made by Borrower to Servicing Agent for the account of
Lenders, Borrower's obligations to Lenders in respect of such payments shall be
deemed to be satisfied upon the making of such payments to Servicing Agent in
the manner provided by this Agreement.
13.9 Amendments in Writing; Integration. This Agreement cannot
be amended or terminated nor may any provision be waived except by a writing
signed by the Requisite Lenders, Servicing Agent and Borrower. Any such waiver
shall be effective only in the specific instance and for the specific purpose
for which given.
As between Borrower, on the one hand, the Lenders and Servicing Agent
on the other hand, all prior agreements, understandings, representations,
warranties, and negotiations between the parties
46
<PAGE>
hereto with respect to the subject matter of this Agreement, if any, are merged
into this Agreement and the Loan Documents.
14. GENERAL PROVISIONS
14.1 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without each Lender's prior written
consent, which consent may be granted or withheld in each Lender's sole
discretion.
14.2 INDEMNIFICATION. BORROWER SHALL, INDEMNIFY, DEFEND,
PROTECT AND HOLD HARMLESS SERVICING AGENT AND EACH LENDER AND EACH'S RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS AGAINST: (A) ALL OBLIGATIONS,
DEMANDS, CLAIMS, AND LIABILITIES CLAIMED OR ASSERTED BY ANY OTHER PARTY IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS; AND (B) ALL
LOSSES OR LENDER'S EXPENSES INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEYS'
FEES AND EXPENSES, IN ANY WAY SUFFERED, INCURRED, OR PAID BY SERVICING AGENT OR
ANY LENDER AS A RESULT OF OR IN ANY WAY ARISING OUT OF, FOLLOWING, OR
CONSEQUENTIAL TO TRANSACTIONS BY AND AMONG LENDERS, SERVICING AGENT AND BORROWER
WHETHER UNDER THE LOAN DOCUMENTS, OR OTHERWISE INCLUDING ANY LENDER'S OR
SERVICING AGENT'S NEGLIGENCE BUT EXCLUDING LOSSES CAUSED BY SERVICING AGENT OR
ANY LENDER'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
14.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
14.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
If any term, provision, covenant, or condition of this Agreement is held by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the provisions shall remain in full force and effect and shall in
no way be affected, impaired, or invalidated and this Agreement shall be
construed as if such invalid, void or unenforceable provision had never been
contained herein.
14.5 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
14.6 Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Lenders
and Servicing Agent with respect to the expenses, damages, losses, costs and
liabilities described in Section 14.2 shall survive until all applicable statute
of limitations periods with respect to actions that may be brought against
Lenders or Servicing Agent have run.
47
<PAGE>
14.7 Confidentiality. In handling any confidential information
of Borrower, Servicing Agent and each Lender shall exercise the same degree of
care that it exercises with respect to its own proprietary information of the
same types to maintain the confidentiality of any non-public information thereby
received or received pursuant to this Agreement, except that disclosure of such
information may be made (i) to the Subsidiaries or Affiliates of Servicing Agent
and each Lender in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Credit Extensions, provided that they have entered into a
comparable confidentiality agreement in favor of Borrower and have delivered a
copy to Borrower, (iii) as required by law, regulation, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Servicing Agent or any Lender,
and (v) as Servicing Agent or any Lender may deem appropriate in connection with
the exercise of any remedies hereunder. Confidential information hereunder shall
not include information that either: (a) is in the public domain or in the
knowledge or possession of Servicing Agent or any Lender when disclosed to
Servicing Agent or such Lender, provided Servicing Agent or such Lender does not
have actual knowledge that such third party is prohibited from disclosing such
information, or becomes part of the public domain after disclosure to Servicing
Agent or any Lender through no fault of Servicing Agent or such Lender; or (b)
is disclosed to Servicing Agent or any Lender by a third party, provided
Servicing Agent or such Lender does not have actual knowledge that such third
party is prohibited from disclosing such information.
14.8 WAIVER OF JURY TRIAL. SERVICING AGENT, LENDERS AND
BORROWER EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY
OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
14.9 NOTICE OF FINAL AGREEMENT. THIS AGREEMENT AND THE LOAN
DOCUMENTS TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VTEL CORPORATION
By: /s/ Dianne Johnson
----------------------------------------
Dianne Johnson, Treasurer
SILICON VALLEY BANK,
AS SERVICING AGENT AND AS A LENDER
By: /s/ J. Douglas Mangum
----------------------------------------
J. Douglas Mangum, Senior Vice President
COMERICA BANK-TEXAS
By: /s/ Robin A. Ingari
----------------------------------------
Robin A. Ingari, Senior Vice President
49
EXHIBIT 21.1
VTEL CORPORATION
LIST OF SUBSIDIARIES
EXHIBIT 21.1
SUBSIDIARY LOCATION OF INCORPORATION
Compression Labs, Incorporated Delaware
VTEL-ICS, Incorporated Delaware
VTEL Australia Ltd. Pty. Australia
CLI Belgium Belgium
CLI Europe Ltd. United Kingdom
VTEL Europe Ltd. United Kingdom
VTEL Germany GmbH Germany
VTEL France S.A. France
VTEL Brazil LTDA Brazil
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-51822, 33-65464, 33-65472, 33-65478, 33-95754,
333-28499, 333-44533, 333-48885 and 333-77733) of VTEL Corporation of our report
dated September 24, 1999 appearing in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
November 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from VTEL
Corporation's Balance Sheet as of July 31, 1999 and Income Statement for the
year then ended and is qualified in its entirety by reference to the company's
Annual Report on Form 10-K for the fiscal period ending July 31, 1999.
</LEGEND>
<CIK> 0000884144
<NAME> VTEL Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,805,000
<SECURITIES> 4,308,000
<RECEIVABLES> 39,514,000
<ALLOWANCES> (1,223,000)
<INVENTORY> 15,553,000
<CURRENT-ASSETS> 68,277,000
<PP&E> 57,697,000
<DEPRECIATION> (27,993,000)
<TOTAL-ASSETS> 124,091,000
<CURRENT-LIABILITIES> 40,142,000
<BONDS> 0
0
0
<COMMON> 260,301,000
<OTHER-SE> (192,282,000)
<TOTAL-LIABILITY-AND-EQUITY> 124,091,000
<SALES> 151,602,000
<TOTAL-REVENUES> 151,602,000
<CGS> (84,364,000)
<TOTAL-COSTS> (82,922,000)
<OTHER-EXPENSES> 919,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (850,699)
<INCOME-PRETAX> (15,615,000)
<INCOME-TAX> 50,000
<INCOME-CONTINUING> (15,565,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,565,000)
<EPS-BASIC> (.66)
<EPS-DILUTED> (.66)
</TABLE>
