<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0-27038
VISIONEER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
34800 CAMPUS DRIVE
FREMONT, CA 94555
(510) 608-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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 [ ]
The number of shares of the registrant's Common Stock, $0.001 par value,
outstanding as of April 30, 1998 was 19,657,642.
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<PAGE> 2
VISIONEER, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets at March 31, 1998 and December 2
31, 1997....................................................
b) Condensed Statements of Operations for the three month 3
periods ended March 31, 1998 and March 31, 1997.............
c) Condensed Statements of Cash Flows for the three month 4
periods ended March 31, 1998 and March 31, 1997.............
d) Notes to Condensed Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations...................................
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Defaults Upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures........................................................... 16
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISIONEER, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $11,922 $11,423
Short-term investments.................................... 2,674 3,029
Accounts receivable, less allowances of $5,095 and
$5,315................................................. 14,299 12,295
Inventory................................................. 4,258 3,078
Prepaid expenses and other current assets................. 633 1,059
------- -------
Total current assets.............................. 33,786 30,884
------- -------
Property and equipment, net................................. 1,986 2,454
------- -------
Other assets................................................ 65 212
------- -------
$35,837 $33,550
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings................................ $ 6,470 $ 2,821
Accounts payable.......................................... 11,880 12,837
Other accrued liabilities................................. 5,912 6,837
------- -------
Total current liabilities......................... 24,262 22,495
------- -------
Long-term liability....................................... 125 125
------- -------
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 19,641,691 and 19,563,854 shares issued and
outstanding............................................ 20 20
Additional paid-in-capital................................ 87,830 87,682
Deferred compensation relating to stock options........... (125) (150)
Notes receivable from stockholders........................ (33) (44)
Accumulated deficit....................................... (76,242) (76,578)
------- -------
Total stockholders' equity........................ 11,450 10,930
------- -------
$35,837 $33,550
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
VISIONEER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
---------- -----------
(IN THOUSANDS, EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues................................................ 19,965 10,048
Cost of revenues............................................ 14,169 17,595
------- --------
Gross profit (loss)....................................... 5,796 (7,547)
------- --------
Operating expenses:
Research and development.................................. 1,132 3,030
Selling, general and administrative....................... 4,566 6,889
------- --------
Total operating expenses.......................... 5,698 9,919
------- --------
Operating profit (loss)..................................... 98 (17,466)
Interest and other income, net.............................. 237 333
------- --------
Net profit (loss)......................................... $ 335 $(17,133)
======= ========
Net profit (loss) per share: basic.......................... $ 0.02 $ (0.89)
======= ========
Net profit (loss) per share: diluted........................ $ 0.02 $ (0.89)
======= ========
Weighted average common shares and equivalents: basic....... 19,600 19,282
======= ========
Weighted average common shares and equivalents: diluted..... 21,845 19,282
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
VISIONEER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss)........................................... $ 335 $(17,133)
Adjustments to reconcile net profit (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 514 633
Accounts receivable allowances......................... (220) 1,225
Other.................................................. 36 25
Changes in assets and liabilities:
Accounts receivable.................................. (1,784) 4,609
Inventory............................................ (1,180) 1,945
Prepaid expenses and other current assets............ 426 (944)
Other assets......................................... 148 --
Accounts payable..................................... (957) (994)
Other accrued liabilities............................ (925) 4,033
------- --------
Net cash used in operating activities....................... (3,607) (6,601)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments....................... 355 7,274
Capital expenditures for property and equipment, net...... (46) 133
------- --------
Net cash provided by investing activities................... 309 7,407
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank borrowings, net........................... 3,649 --
Proceeds from issuance of common stock, net............... 148 442
------- --------
Net cash provided by financing activities................... 3,797 442
------- --------
Net increase in cash and cash equivalents................... 499 1,248
Cash and cash equivalents at beginning of period............ 11,423 22,391
------- --------
Cash and cash equivalents at end of period.................. $11,922 $ 23,639
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
VISIONEER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Visioneer,
Inc. (the "Company" or "Visioneer") have been prepared in accordance with
generally accepted accounting principles. In the opinion of management, these
interim condensed financial statements reflect all adjustments, consisting of
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows at March 31, 1998, and for other periods
presented. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
The results for the quarter ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998, or any future period.
The preparation of 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 on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company's fiscal year ends on the Sunday closest to December 31.
Accordingly, fiscal 1998 will end December 27, 1998 and will contain 52 weeks,
fiscal 1997 ended December 28, 1997 and also contained 52 weeks. The Company
reports quarterly results on thirteen-week quarterly periods, each ending on the
Sunday closest to month-end. For purposes of presentation, the Company has
indicated its accounting year as ending December 31 and its interim quarterly
periods as ending on the respective calendar month-end.
NOTE 2. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials........................................ $2,100 $1,536
Work-in-process...................................... 264 329
Finished goods....................................... 1,894 1,213
------ ------
$4,258 $3,078
====== ======
</TABLE>
NOTE 3. NET PROFIT (LOSS) PER SHARE
Net profit (loss) per share is calculated in accordance with the provisions
of Statement of Financial Accounting Standards No. 128 - "Earnings per Share"
(SFAS No. 128), effective beginning 1997. SFAS No. 128 requires the Company to
report both basic earnings per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings per share, which is
based on the weighted average number of common shares outstanding and dilutive
potential common shares outstanding. Options to purchase 145,000 shares of
common stock at a weighted average price of $7.08 per share were outstanding at
March 31, 1998 but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares. For the quarter ended March 31, 1997, weighted average options
outstanding, aggregating 1,115,879, with a weighted average exercise price of
$1.55,
5
<PAGE> 7
VISIONEER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
were excluded from diluted earnings per share calculations because they were
anti-dilutive in view of the losses incurred by the Company.
The following details the computation for basic and diluted profit (loss)
per share:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Net profit (loss)...................................... $ 335 $(17,133)
------- --------
Weighted average common shares outstanding (basic)..... 19,600 19,282
Effect of dilutive options and warrants................ 2,245 --
------- --------
Weighted average common shares outstanding (diluted)... 21,845 19,282
------- --------
Profit (loss) per share: basic......................... $ 0.02 $ (0.89)
======= ========
Profit (loss) per share: diluted....................... $ 0.02 $ (0.89)
======= ========
</TABLE>
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards. SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income within a financial statement. This Statement requires the
Company to report additional information on comprehensive income to supplement
the reporting of income. SFAS No. 130 is effective for the year ending December
31, 1998. Comparative financial statements provided for earlier periods are
required to be reclassified so that comprehensive income is displayed in a
comparative format for all periods presented. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards for
reporting information about operating segments in annual and interim financial
statements. This Statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997; interim
disclosure is not required in the year of adoption. The Company has adopted SFAS
No 130 for the first quarter of 1998. There were no items of comprehensive
income in the first quarter of the year. The Company will adopt SFAS No. 131 as
of the year ending December 31, 1998 and is currently studying its provisions.
NOTE 5. DEBT
On March 19, 1998, the Company amended its $7.5 million line of credit
increasing the line to $12.5 million and extending the expiration date to March
1999. The line of credit is collateralized by a security interest in the
Company's assets. At March 31, 1998, the Company had bank borrowings of $6.5
million and outstanding letters of credit of $5.3 million.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
FINANCIAL STATEMENTS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN,
THE MATTERS DISCUSSED IN THIS DOCUMENT ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS
AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE MENTIONED IN THIS REPORT
AND, IN PARTICULAR, THE FACTORS DESCRIBED UNDER "ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS," AND THOSE MENTIONED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 UNDER "BUSINESS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
OVERVIEW
Visioneer was incorporated in California in March 1992, and commenced
shipment of its initial product in the first quarter of 1994. In December 1995,
the Company reincorporated in Delaware in conjunction with its initial public
offering and raised $49.9 million, net of issuance costs. The Company has
experienced sequential growth in annual net revenues since the first year of
product shipments. The dramatic annual growth rates from 1994 to 1996 were
directly attributed to dramatic growth within the sheetfed scanner and document
management software markets, the development of OEM relationships and new
product introductions. In contrast, the slower growth from 1996 to 1998 was
attributed to several factors. First, the grayscale sheetfed scanner market
declined sharply with the advent of color sheetfed scanners. The transition of
the market from grayscale to color occurred at a much faster rate than the
Company had anticipated and, as a result, the Company recorded significant
charges relating to grayscale inventory reserves, purchase order commitments and
price protection charges in the first half of 1997. Second, the Company was late
in introducing a color scanner product and, as a result, did not capture planned
market share. Third, the Company's slower growth was further affected by
increased competition which caused overall sheetfed scanner average selling
prices to drop significantly. And finally, the growth of the sheetfed scanner
market, despite its earlier significant growth rates, has leveled off, and, in
fact, recent independent market reports show the sheetfed scanner market
declining in size.
A key component of the Company's business strategy is to penetrate the much
larger and rapidly growing flatbed market by leveraging off of its award winning
software. Historically, the Company has bundled its PaperPort software with its
scanner products, which has provided significant product differentiation. In the
second quarter of 1997, the Company decided to continue to leverage the merits
of its software in an attempt to penetrate the flatbed scanner market. The
PaperPort flatbed scanner line was introduced in September 1997. Despite an
intensely competitive market, the Company's initial efforts have been
successful. Recent PC Data reports indicate the Company holds approximately 10%
share of the U.S. flatbed market. There can be no assurance that the Company
will be able to increase or maintain its share of the flatbed scanner market.
The success of the Company will depend on its ability to improve gross
margins and generate sales of PaperPort products significantly in excess of
sales during recent quarters. These in turn will depend in part on the ability
of the Company and its distributors, resellers and OEM partners to convince
end-users to adopt paper and image input systems for the desktop and to educate
end-users about the benefits of the Company's products. There can be no
assurance that the market for the Company's products will develop or that the
Company will achieve market acceptance of its products. Despite experiencing a
number of quarters of profitability throughout its brief history, the Company
has incurred annual net losses since inception. There can be no assurance that
the Company will be able to maintain quarterly profitability or attain annual
profitability in the near future. As of March 31, 1998, the Company had an
accumulated deficit of $76.2 million. Although the Company has experienced
revenue growth during the last several quarters, these growth rates may not be
sustainable and are not necessarily indicative of future operating results.
7
<PAGE> 9
RESULTS OF OPERATIONS
The following table presents, as a percentage of net revenues, certain
selected financial data for the three month periods ended March 31, 1998 and
March 31, 1997.
VISIONEER, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
------- --------
(IN THOUSANDS,
EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
Cost of revenues............................................ 71.0% 175.1%
----- ------
Gross profit (loss)....................................... 29.0% (75.1)%
Operating expenses:
Research and development.................................. 5.7% 30.2%
Selling, general and administrative....................... 22.9% 68.6%
----- ------
Total operating expenses.......................... 28.5% 98.7%
----- ------
Operating profit (loss)..................................... 0.5% (173.8)%
Interest and other income, net.............................. 1.2% 3.3%
----- ------
Net profit (loss)........................................... 1.7% (170.5)%
===== ======
</TABLE>
Net Revenues
Net revenues increased 99% to $20.0 million for the three month period
ended March 31, 1998, from $10.0 million for the comparable period in 1997, due
primarily to an increase in product revenues, partially offset by a decrease in
royalty and development revenues. The increase in product revenues was
attributable to significant increases in both hardware and software sales.
Royalty and development revenues decreased as a result of the reduction in
royalty revenues from Hewlett-Packard. The growth in hardware sales was led by
the strong demand for the Company's flatbed scanners introduced in September
1997. The Company's software sales grew dramatically between the comparable
three month periods, as PaperPort Deluxe software continued to gain market
acceptance and market share. In addition, in March 1998, the Company commenced
shipment of Visioneer ProOCR100, its first entry into the optical character
recognition ("OCR") market. The Company hopes to win a significant share of this
market by pricing Visioneer ProOCR100 well below its competitors at a suggested
retail list price of $49.99. Both scanner and software revenue growth did not
match unit sales growth as overall average selling prices of scanners and
software continued their downward trend.
Despite declining average retail prices, net revenues from international
sales held essentially flat for the three month period ended March 31, 1998 as
compared to the same period in 1997. In order to increase profitability for its
international operations, in April 1997, the Company terminated its local sales
operations for Europe and the Asia-Pacific regions and began searching for
distribution partners who have established sales outlets and local country
expertise. This strategy, designed to minimize expenses and maximize
profitability for the regions, has not been fully implemented, and it is
unlikely that the Company will be able to realize significant increases in the
near future, in absolute terms, in revenues from international operations.
The introduction of major new products and enhancements of existing
products, such as PaperPort flatbed scanners and Visioneer ProOCR100 software,
are expected to have a significant impact on the Company's quarterly and annual
revenues. As is characteristic of the initial stages of personal computer
product life cycles, the Company expects that sales volumes of new products will
initially increase in the months following introduction due to the purchase of
initial inventory by the Company's distribution channels.
8
<PAGE> 10
Thereafter, revenues may decline or stabilize until the end of a product life
cycle, at which time revenues are likely to decline significantly, as a result
of the reduction in unit sales and prices. At the end of a product life cycle
the Company may experience higher rates of return and/or increased price
protection charges as a result of price reductions. This could have a material
adverse impact on the Company's net revenues and operating results. Although the
Company has sought to mitigate the effect of such transitions by controlling
inventory levels at its distributors and resellers, channel inventory levels are
very difficult to accurately quantify. The Company may experience higher than
normal rates of return and may incur significant price protection charges on its
older version products in connection with its planned release of new products
and price reductions in 1998. Due to the inherent uncertainties of product
development and new product introductions, the Company cannot accurately predict
the exact quarter in which a new product or version will be ready to ship. Any
delay in the scheduled release of major new products could have a material
adverse impact on the Company's net revenues and operating results.
Cost of Revenues
Cost of revenues as a percentage of net revenues was 71% for the three
month period ended March 31, 1998, as compared to 175% for the comparable period
in 1997. In the three month period ended March 31, 1997, the Company recorded
charges of approximately $9.5 million to cover purchase order cancellation
charges and to increase inventory reserves related to excess and obsolete
products. The charges were a result of the market's transition from grayscale
scanners to color scanners and the Company's late introduction of color scanner
products. Subsequent to recording these charges, the Company was able to sell
its grayscale inventory at prices higher than originally anticipated and settle
with vendors for cancellations at amounts lower than contractually obligated,
which favorably impacted the Company's gross margins and results of operations
during the last several quarters. However, the Company anticipates that gross
margins will decrease from the 29% experienced for the three month period ended
March 31, 1998, due to pressure from competitors to decrease prices and the
anticipated decrease of revenue as a percentage of net revenues from higher
margin software and royalty revenue.
The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. The Company expects
that, based on historical trends in the computer and peripherals industry and,
in particular, based on the Company's recent observations and experiences in the
sheetfed and flatbed scanner markets, prices will continue to decline in the
future and competitors will offer products which meet or exceed performance and
capabilities of the Company's products. The Company intends to introduce new
hardware designs, software products and software upgrades, accessory products
and new software features, in part, to respond to anticipated competitive price
pressures and new product introductions. If prices fall faster than expected by
the Company, or if the Company reduces its prices in order to become or remain
competitive or for any other reason, the Company may be unable to respond with
significant cost reductions, and its gross profit could be materially adversely
affected. In addition, the Company's gross profit will depend in part on other
factors including the ability of its manufacturing partners to meet their
manufacturing commitments, the success of the Company's product transition,
competition, the timing and amount of royalties received under its OEM
arrangements, the ability of the Company to accurately forecast the mix and
levels of its inventory requirements, and general economic conditions.
Fluctuations in gross profit could have a material adverse affect on the
Company's financial condition and operating results.
Research and Development Expenses
Research and development expense decreased 63% to $1.1 million in the three
month period ended March 31, 1998 from $3.0 million in the comparable period in
1997. The significant decrease in spending was the result of the Company's
implementation of a strategy to focus on software development, and leverage the
engineering resources of its manufacturing partners to design future hardware
products. The ease of use and intelligent user interface of the Company's
software products have been, and will continue to be, a key differentiator
within the scanner and document and image management market. Therefore, the
Company expects to continue to make significant investments in research and
development over the foreseeable future,
9
<PAGE> 11
although at levels below those experienced in the first and second quarters of
1997. However, such expenses may fluctuate from quarter to quarter depending on
a variety of factors including the status of various development projects. To
date, the Company has not capitalized any development costs and does not
anticipate capitalizing any such costs in the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 34% to $4.6 million
in the three month period ended March 31, 1998 from $6.9 million in the
comparable period in 1997. The decrease was primarily attributable to the
Company's abandonment of its previous strategy of investing heavily in the
promotion of its brand name and the establishment of the sheetfed scanner
category, which was in conjunction with the Company's restructuring plan in May
1997. The plan included a decrease of approximately 40% of total employee and
consultant headcount and a significant reduction in variable sales and marketing
expenditures. Although the spending cuts were designed to decrease the Company's
on-going operating expenses, there can be no assurance that the spending cuts
will not adversely affect future revenue levels, which would have an adverse
affect on the Company's financial condition and future operating results.
Although the Company has adopted rigid spending controls, selling, general and
administrative expenses may fluctuate from quarter to quarter based on a variety
of factors, including the timing of the introduction of any new products,
expansion of the Company's distribution channels, general advertising related to
product introductions, variable channel marketing programs, and a new
international sales and marketing strategy. In this regard, the Company expects
selling, general and administrative expenses to increase in absolute terms for
the second quarter of 1998 when compared to the first quarter of 1998, due to
the planned introduction of new products and increase in net revenues.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest earned on
cash equivalents and short-term investments. Interest and other income, net was
$237,000 for the three month period ended March 31, 1998 compared to $333,000
for the three month period ended March 31, 1997. The decrease was the result of
a decrease in interest income from decreased cash equivalents and short-term
investments in the respective periods.
Taxation
The Company had no tax provision during the three month period ended March
31, 1998 due to availability of loss carryforwards and tax credits. There was no
tax provision for the three month period ended March 31, 1997 due to the net
loss incurred.
Liquidity and Capital Resources
As of March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $14.6 million and working capital of $9.5 million, as compared to
$25.2 million of cash, cash equivalents and short-term investments and $12.9
million of working capital at March 31, 1997.
The Company used $3.6 million of cash for operating activities in the three
month period ended March 31, 1998. The use of cash was primarily to fund a $1.8
million increase in receivables and a $1.2 million increase in inventory. The
balance of the activity was attributable to changes in other working capital and
non-cash charges. Cash used in the three month period ended March 31, 1997 was
$6.6 million. The negative cash flows from operating activities was attributed
to net loss of $17.1 million, offset by non-cash charges and changes in working
capital.
Cash provided by investing activities for the three month periods ended
March 31, 1998 and March 31, 1997 was $310,000 and $7.4 million, respectively,
as the Company had a net decrease in short-term investments for both periods.
10
<PAGE> 12
Cash provided by financing activities for the three months ended March 31,
1998 was $3.8 million. The Company increased short-term bank borrowings by $3.6
million to $6.5 million from $2.8 million at December 31, 1997, and an
additional $148,000 was raised from the issuance of new Common Stock in
connection with the Company's employee stock purchase plan. Cash provided by
financing activities was $442,000 for the three month period ended March 31,
1997. The cash was the result of the issuance of Common Stock in connection with
the Company's employee stock purchase plan and the exercise of employee stock
options.
As the Company introduces and ramps up production of its new products in
subsequent quarters, its investment in inventory, especially flatbed scanner
inventory, and accounts receivable will continue to represent a significant
portion of working capital. In order to increase liquidity, in March 1998, the
Company renegotiated its $7.5 million line of credit to be increased to $12.5
million. As of March 31, 1998, the Company's principal sources of liquidity
consisted of $14.6 million of cash, cash equivalents and short-term investments,
and $688,000 available under the line of credit, after deducting $5.3 million
for outstanding letters of credit. The Company believes that its existing
sources of liquidity, including current cash balances and its line of credit,
will provide adequate cash to fund its operations for at least the next twelve
months. Thereafter, if cash generated by operations is insufficient to satisfy
the Company's liquidity requirements, the Company may be required to sell
additional equity or debt securities. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company intends to take advantage of the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that the following important factors, as well as other
factors, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
quarters to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company in this report.
Dependence on Developing Market; Product Concentration
The market for paper input systems and, in particular, for the Company's
PaperPort products, is new and rapidly evolving. The Company currently derives
substantially all of its revenues from its PaperPort products and expects that
revenues from these products will continue to account for a substantial portion
of all of its revenues for the foreseeable future. Broad market acceptance of
PaperPort products is critical to the Company's future success. This success
will depend in part on the ability of the Company, its distributors and other
suppliers of paper input scanners to convince end users to adopt paper input
systems for the desktop, and the Company's ability to educate end users about
the benefits of its products. This success will also depend in part on the
Company's ability to offer competitive hardware and software features in its
PaperPort products in a limited period of time.
Difficulties and Risks Associated with New Product Introduction and
Development
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. The Company's success will
depend to a substantial degree upon its ability to develop and introduce in a
timely fashion new products and enhancements to its existing products that meet
changing customer requirements and emerging industry standards, including the
Company's recent introduction of its color flatbed scanner products and
Visioneer ProOCR100 software. The development of new, technologically-advanced
products and product enhancements is a complex and uncertain process requiring
high levels of innovation, as well as the accurate anticipation of technological
and market trends. In this respect, the Company believes there will be a
significant market demand for color sheetfed and flatbed scanner products. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market or support new products and product enhancements
successfully, that any new products or product enhancements will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes, emerging industry standards or product announcements by
competitors. New product
11
<PAGE> 13
announcements by the Company could cause customers to defer purchasing existing
products or cause the Company to lower prices of its older products, resulting
in distributors claiming price protection credits or returning such products to
the Company. Any of these events could have a material adverse effect on the
Company's business, operating results and financial condition.
The introduction of major new products and enhancements of existing
products, such as PaperPort 3000 and PaperPort 6000, introduced in the third
quarter of 1997 and Visioneer ProOCR100 introduced in the first quarter of 1998,
has had, and will continue to have, a significant impact on the Company's
quarterly and annual revenues. As is characteristic of the initial stages of
personal computer product life cycles, the Company expects that sales volumes of
any new product may increase in the first few months following introduction due
to the purchase of initial inventory by the Company's distributors and
resellers. Thereafter, revenues may decline or stabilize until the end of a
product life cycle, at which time revenues are likely to decline significantly.
The Company must successfully manage the transition to new products and new
versions of existing products. At the end of a product life cycle the Company
may experience higher rates of return on its older products and may have to
lower the prices of such products, which would result in increased price
protection charges and could have a material adverse impact on the Company's net
revenues and operating results. The Company experienced higher than normal rates
of return of its grayscale scanner products over the last several quarters and
incurred significant price protection charges in connection with the Company's
release of the PaperPort Strobe color sheetfed scanner. Due to the inherent
uncertainties of product development and new product introductions, the Company
cannot accurately predict the exact timing in which a new product or version
will be ready to ship. Any delay in the scheduled release of major new products
would have a material adverse impact on the Company's net revenues and operating
results.
Fluctuations in Operating Results
The Company has experienced and may continue to experience significant
fluctuations in revenues and operating results from quarter to quarter and from
year to year due to a combination of factors, many of which are outside of the
Company's direct control. These factors include development of the paper input
systems market, demand for the Company's products, the Company's success in
developing, introducing and shipping new products and product enhancements, the
market acceptance of such products, the Company's ability to respond to new
product introductions and price reductions by its competitors, which the Company
expects will continue through the foreseeable future, the timing, cancellation
or rescheduling of significant orders, the purchasing patterns and potential
product returns from the Company's distribution channels, the Company's
relationships with its OEM partners and distributors, the performance of the
Company's manufacturing partners and component suppliers, the availability of
key components and changes in the cost of materials for the Company's products,
the Company's ability to attract, retain and motivate qualified personnel, the
timing and amount of research and development and selling, general and
administrative expenditures, and general economic conditions.
Revenues and operating results in any quarter depend, to a large extent, on
the volume, timing and ability to fulfill customer orders, the receipt of which
is difficult to forecast. A significant portion of the Company's operating
expenses is relatively fixed in advance, based in large part on the Company's
forecasts of future sales. If sales are below expectations in any given period,
the adverse effect of a shortfall in sales on the Company's operating results
may be magnified by the Company's inability to adjust operating expenses to
compensate for such shortfall. Accordingly, any significant shortfall in
revenues relative to the Company's expectations would have an immediate material
adverse impact on the Company's business, operating results and financial
condition. The Company may also be required to reduce prices in response to
competition or to increase its spending to pursue new product or market
opportunities. In the event of significant price competition in the market for
the Company's products, which is anticipated, the Company will be required to
decrease costs at least proportionately and the Company will be at a significant
disadvantage with respect to its competitors that have substantially greater
resources. Such competitors may more readily withstand an extended period of
downward pricing pressure. In such event, the Company will also incur price
protection charges from its
12
<PAGE> 14
distributors and resellers. Any price protection charges in excess of recorded
allowances would have a material adverse effect on the Company's business,
operating results and financial condition.
Due to the foregoing factors, it is likely that at some point in the future
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. Accordingly, the Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies participating in new and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks.
Dependence on Manufacturing Partners
The Company currently has four manufacturing partners which manufacture
virtually all of its hardware and software products. All hardware manufacturing
partners are located in the Far East, and therefore, the Company is exposed to
the political and economic risks associated with doing business in this region,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, commencement of production of
products at new or existing facilities involves certain start-up risks, such as
those associated with the procurement of materials and training of production
personnel, which may result in delays and quality issues. The unanticipated loss
of any of the manufacturing partners could cause delays in the Company's ability
to fulfill orders while the Company identifies a replacement manufacturer. Such
an event could have a material adverse effect on the Company's business,
operation results and financial condition.
The Company's manufacturing policies are designed to take advantage of
lower manufacturing costs overseas, which may, in certain instances, result in
excess or insufficient inventory if orders do not match forecasts. To date, the
Company's inventory reflects purchases based on forecasted sales. There can be
no assurance that actual sales will match sales forecasts. To the extent the
Company has excess inventory, the Company may experience inventory write-downs
or may have to lower product prices which would result in substantial price
protection charges and a negative impact on gross margins. In this regard, the
Company experienced a significant excess inventory situation during the quarter
ended March 31, 1997, and recorded significant inventory write-down and price
protection charges. Although the Company has made significant progress in
reducing its inventory risk over the last several quarters, there can be no
assurance that the Company will be successful in its continuing efforts and will
not experience similar excess inventory situations.
Dependence on Distributors and Resellers
To date, the Company has derived a substantial portion of its revenues from
sales through its independent distributors and resellers. Although the Company
has established several strategic OEM partnerships, the Company expects that
sales through its independent distributors and resellers will continue to
account for a substantial portion of its revenues in the foreseeable future.
Sales to the top four independent distributors and resellers accounted for 46%
of the Company's net revenues in the first three months of 1998. The Company
anticipates that its dependence on any one independent distributor or reseller
will decrease in the future because of efforts to expand distribution channels.
The Company's agreements with distributors and resellers are not exclusive, and
each of the Company's distributors and resellers can cease marketing the
Company's products with limited notice and with little or no penalty. There can
be no assurance that the Company's independent distributors and resellers will
continue to offer the Company's products or that the Company will be able to
recruit additional or replacement distributors or resellers. The loss of one or
more of the Company's major distributors or resellers could have a material
adverse effect on the Company's business, operating results and financial
condition. Many of the Company's distributors and resellers offer competitive
products manufactured by third parties. There can be no assurance that the
Company's distributors or resellers will give priority to the marketing of the
Company's products. Any reduction or delay in sales of the Company's products by
its distributors and resellers could have a material adverse effect on the
Company's business, operating results and financial condition.
13
<PAGE> 15
Intensely Competitive Market
The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. As an example, the
suggested retail price of PaperPort Strobe, when it was introduced in June 1997,
was $299, the suggested retail price as of May 1, 1998 is $199. The Company
expects that, based on historical trends in the computer and peripherals
industry and, in particular, on the Company's recent observations and
experiences in the paper management systems market, prices will continue to
decline in the future and that competitors will offer products which meet or
exceed performance and capabilities of the Company's products. The Company
intends to introduce new hardware designs, software products, software upgrades,
accessory products and software features, to respond to anticipated competitive
price pressures and new product introductions. If prices fall faster than
expected by the Company, or if the Company reduces its prices in order to become
or remain competitive or for any other reason, the Company may be unable to
respond with significant cost reductions and its gross margin could be
materially adversely affected. In addition, the Company's gross margin will
depend in part on other factors outside of the Company's control, including the
availability and prices of key components, the success of the Company's product
transition, competition, the timing and amount of royalties received under its
OEM arrangements and general economic conditions. Fluctuations in gross margin
could have a material adverse effect on the Company's financial condition and
operating results.
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.32C Amended and Restated Loan and Security Agreement dated March
19, 1998 between the Registrant and Silicon Valley Bank.
10.33 Letter of Agreement dated September 11, 1996 between the
Registrant and Best Buy Co., Inc.
27.1 Financial Data Schedule
</TABLE>
- ---------------
C Confidential treatment requested
(b) Reports on Form 8-K
None.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this Report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on May 12, 1998.
VISIONEER, INC.
By: /s/ GEOFFREY C. DARBY
------------------------------------
Geoffrey C. Darby
Vice President of Finance and
Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------
<S> <C>
10.32* Amended and Restated Loan and Security Agreement dated March
19, 1998 between the Registrant and Silicon Valley Bank.
10.33 Letter of Agreement dated September 11, 1996 between the
Registrant and Best Buy Co., Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.32
================================================================================
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
VISIONEER, INC.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1 ACCOUNTING AND OTHER TERMS.................................................................4
2 LOAN AND TERMS OF PAYMENT..................................................................4
2.1 Credit Extensions................................................................4
2.2 Overadvances.....................................................................5
2.3 Interest Rate, Payments..........................................................5
2.4 Fees.............................................................................5
3 CONDITIONS OF LOANS........................................................................6
3.1 Conditions Precedent to Initial Credit Extension.................................6
3.2 Conditions Precedent to all Credit Extensions....................................6
4 CREATION OF SECURITY INTEREST..............................................................6
4.1 Grant of Security Interest.......................................................6
5 REPRESENTATIONS AND WARRANTIES.............................................................6
5.1 Due Organization and Authorization...............................................6
5.2 Collateral.......................................................................6
5.3 Litigation.......................................................................7
5.4 No Material Adverse Change in Financial Statements...............................7
5.5 Solvency.........................................................................7
5.6 Regulatory Compliance............................................................7
5.7 Subsidiaries.....................................................................7
5.8 Full Disclosure..................................................................7
6 AFFIRMATIVE COVENANTS......................................................................8
6.1 Government Compliance............................................................8
6.2 Financial Statements, Reports, Certificates......................................8
6.3 Inventory; Returns...............................................................8
6.4 Taxes............................................................................9
6.5 Insurance........................................................................9
6.6 Primary Accounts.................................................................9
6.7 Financial Covenants..............................................................9
6.8 Registration of Intellectual Property Rights.....................................9
6.9 Further Assurances...............................................................9
7 NEGATIVE COVENANTS........................................................................10
7.1 Dispositions....................................................................10
7.2 Changes in Business, Ownership, Management or Business Locations................10
7.3 Mergers or Acquisitions.........................................................10
7.4 Indebtedness....................................................................10
7.5 Encumbrance.....................................................................10
7.6 Distributions; Investments......................................................10
7.7 Transactions with Affiliates....................................................10
7.8 Subordinated Debt...............................................................11
7.9 Compliance......................................................................11
8 EVENTS OF DEFAULT.........................................................................11
8.1 Payment Default.................................................................11
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
8.2 Covenant Default................................................................11
8.3 Material Adverse Change.........................................................11
8.4 Attachment......................................................................11
8.5 Insolvency......................................................................12
8.6 Other Agreements................................................................12
8.7 Judgments.......................................................................12
8.8 Misrepresentations..............................................................12
9 BANK'S RIGHTS AND REMEDIES................................................................12
9.1 Rights and Remedies.............................................................12
9.2 Power of Attorney...............................................................13
9.3 Accounts Collection.............................................................13
9.4 Bank Expenses...................................................................13
9.5 Bank's Liability for Collateral.................................................13
9.6 Remedies Cumulative.............................................................13
9.7 Demand Waiver...................................................................14
10 NOTICES..................................................................................14
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER..............................................14
12 GENERAL PROVISIONS.......................................................................14
12.1 Successors and Assigns.........................................................14
12.2 Indemnification................................................................14
12.3 Time of Essence................................................................14
12.4 Severability of Provision......................................................14
12.5 Amendments in Writing, Integration.............................................15
12.6 Counterparts...................................................................15
12.7 Survival.......................................................................15
12.8 Confidentiality................................................................15
12.9 Effect of Amendment and Restatement............................................15
13 DEFINITIONS..............................................................................15
13.1 Definitions....................................................................15
</TABLE>
3
<PAGE> 4
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is dated March 19,
1998, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054 and VISIONEER, INC. ("Borrower"), whose address is
34800 Campus Drive, Fremont, California 94555.
RECITALS
A. Bank and Borrower are parties to that certain Loan and Security
Agreement, dated June 26, 1997, as amended (collectively, the "Original
Agreement").
B. Borrower and Bank desire in this Agreement to set forth their
agreement with respect to a working capital loan and to amend and restate in its
entirety without novation the Original Agreement in accordance with the
provisions herein.
AGREEMENT
The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding (i) the lesser of (A) the
Committed Revolving Line or (B) the Borrowing Base, whichever is less, minus
(ii) the amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit). Amounts borrowed under this Section may be
repaid and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit C. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other amounts due under this Agreement are
immediately payable.
4
<PAGE> 5
2.1.2 LETTERS OF CREDIT.
Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing
Base minus (ii) the outstanding principal balance of the Advances; however, the
face amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) may not exceed $12,500,000.
Each Letter of Credit will have an expiry date of no later than 180 days after
the Revolving Maturity Date, but Borrower's reimbursement obligation will be
secured by cash on terms acceptable to Bank at any time after the Revolving
Maturity Date if the term of this Agreement is not extended by Bank.
2.1.3 CASH MANAGEMENT SERVICES FACILITY.
Borrower may use up to $100,000 for Bank's Cash Management Services,
which may include merchant services, direct deposit of payroll, business credit
card, and check cashing services identified in various cash management services
agreements related to such services (the "Cash Management Services"). All
amounts Bank pays for any Cash Management Services will be treated as a Credit
Extension under the Cash Management Services Facility. The Cash Management
Services Facility terminates on the Cash Management Maturity Date, when all
amounts due under this Cash Management Services Facility are immediately
payable.
2.2 OVERADVANCES.
If Borrower's Obligations under Section 2.1.1 and 2.1.2 exceed the
lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base,
Borrower must immediately pay Bank the excess.
2.3 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at Borrower's option of either (a) a per annum rate of [ * ] percentage
points above the Prime Rate or (b) [ * ] basis points above the LIBOR Rate.
After an Event of Default, Obligations accrue interest at [ * ] percent above
the rate effective immediately before the Event of Default. The interest rate
increases or decreases when the Prime Rate changes. Interest is computed on a
360 day year for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 18th of each month. Bank may debit any of Borrower's deposit accounts
including Account Number _____________________________ for principal and
interest payments or any amounts Borrower owes Bank. Bank will notify Borrower
when it debits Borrower's accounts. These debits are not a set-off. Payments
received after 12:00 noon Pacific time are considered received at the opening of
business on the next Business Day. When a payment is due on a day that is not a
Business Day, the payment is due the next Business Day and additional fees or
interest accrue.
2.4 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $[ * ]
due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the date of this Agreement, are
payable when due.
*Confidential Treatment Requested
5
<PAGE> 6
3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain true.
4 CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower continues to grant to Bank a continuing security interest in
all presently existing and later acquired Collateral to secure all Obligations
and performance of each of Borrower's duties under the Loan Documents. Except
for Permitted Liens, any security interest will be a first priority security
interest in the Collateral. Any UCC-1 financing statements, or amendments
thereto, or filings with respect to Borrower's intellectual property, filed by
Bank to secure the Obligations of Borrower shall remain in full force and
effect. All security interests granted under the Original Agreement are hereby
confirmed and ratified and shall continue to secure all Indebtedness under this
Agreement. Bank may place a "hold" on any deposit account pledged as Collateral.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except
Permitted Liens. The Accounts are bona fide, existing obligations, and the
service or property has been performed or delivered to the account debtor or its
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has no notice of any actual or imminent Insolvency Proceeding
of any account debtor whose accounts are an Eligible Account in any Borrowing
Base Certificate. All Inventory is in all material
6
<PAGE> 7
respects of good and marketable quality, free from material defects. Borrower is
the sole owner of the Intellectual Property, except for non-exclusive licenses
granted to its customers in the ordinary course of business. Each Patent is
valid and enforceable and no part of the Intellectual Property has been judged
invalid or unenforceable, in whole or in part, and no claim has been made that
any part of the Intellectual Property violates the rights of any third party.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue
its business as currently conducted.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading.
7
<PAGE> 8
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify could have a material
adverse effect on Borrower's business or operations. Borrower will comply, and
have each Subsidiary comply, with all laws, ordinances and regulations to which
it is subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 90 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm acceptable to Bank; (iii) within 5 days of filing, copies
of all statements, reports and notices sent or made available generally by
Borrower to its security holders and all reports on Form 10-K, 10-Q and 8-K
filed with the Securities and Exchange Comission (iv) a prompt report of any
legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of $100,000 or
more; (v) budgets, sales projections, operating plans or other financial
information Bank requests; and (vi) prompt notice of any material change in the
composition of the Intellectual Property, including any subsequent ownership
right of Borrower in or to any Copyright, Patent or Trademark not shown in any
intellectual property security agreement between Borrower and Bank or knowledge
of an event that materially adversely affects the value of the Intellectual
Property.
(b) Upon the initial Advance or when there are outstanding Advances,
within 20 days after the last day of each month, Borrower will deliver to Bank a
Borrowing Base Certificate signed by a Responsible Officer in the form of
Exhibit D, with aged listings of accounts receivable and accounts payable.
(c) Within 20 days after the last day of each month, Borrower will
deliver to Bank a retail and distributor sell-through report.
(d) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit E.
(e) Bank has the right to audit Borrower's Accounts at Borrower's
expense, but the audits will be conducted no more often than every 6 months
unless an Event of Default has occurred and is continuing.
6.3 INVENTORY; RETURNS.
Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims, that involve more than $50,000.
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6.4 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
will have a lender's loss payable endorsement showing Bank as an additional loss
payee and all liability policies will show the Bank as an additional insured and
provide that the insurer must give Bank at least 20 days notice before canceling
its policy. At Bank's request, Borrower will deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under any policy
will, at Bank's option, be payable to Bank on account of the Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts
with Bank.
6.7 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month:
(i) QUICK RATIO. A ratio of Quick Assets less distributor
Accounts greater than 60 days from the due date to Current Liabilities of at
least [ * ] to 1.00 through the month ended June 30, 1998, increasing to [ * ]
to 1.00 for each month thereafter.
(ii) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities
less Subordinated Debt to Tangible Net Worth less distributor Accounts greater
than 60 days from the due date plus Subordinated Debt of not more than [ * ] to
1.00.
(iii) TANGIBLE NET WORTH. A Tangible Net Worth of at least [ * ].
6.8 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
Borrower will register with the United States Patent and Trademark
Office or the United States Copyright Office Intellectual Property rights on
Exhibits A, B, C, and D to the Addendum to Intellectual Property Security
Agreement within 30 days of the date of this Agreement, and additional
Intellectual Property rights developed or acquired including revisions or
additions with any product before the sale or licensing of the product to any
third party.
Borrower will (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property and promptly advise Bank in writing
of material infringements and (ii) not allow any Intellectual Property to be
abandoned, forfeited or dedicated to the public without Bank's written consent.
6.9 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank requests to perfect or continue Bank's security interest in the Collateral
or to effect the purposes of this Agreement.
*Confidential Treatment Requested
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7 NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, 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; or (iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or have a material
change in its ownership of greater than 25%. Borrower will not, without at least
30 days prior written notice, relocate its chief executive office or add any new
offices or business locations.
7.3 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, if no Event of Default has occurred and is
continuing or would result from such action during the term of this Agreement or
result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge or
consolidate a Subsidiary into another Subsidiary or into Borrower.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
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7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that 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, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default cannot be cured within 10 days or cannot be cured
after Borrower's attempts within 10 day period, and the default may be cured
within a reasonable time, then Borrower has an additional period (of not more
than 30 days) to attempt to cure the default. During the additional time, the
failure to cure the default is not an Event of Default (but no Credit Extensions
will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or priority
of the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
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8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets,
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trade names, Trademarks, service marks, and advertising matter, or any similar
property as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section, Borrower's rights under all licenses
and all franchise agreements inure to Bank's benefit; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices it is not liable for:
(a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral;
(c) any diminution in the value of the Collateral; or (d) any act or default of
any carrier, warehouseman, bailee, or other person. Borrower bears all risk of
loss, damage or destruction of the Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
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9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12 GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
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12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.
12.6 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, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 EFFECT OF AMENDMENT AND RESTATEMENT.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall continue to be
outstanding under this Agreement. All security interests granted under the
Original Agreement are hereby confirmed and ratified and shall continue to
secure all Obligations under this Agreement.
13 DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCE(S)" is a loan advance (or advances) under the
Committed Revolving Line.
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"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"BORROWING BASE" is (a) (i) as to domestic Accounts, an amount equal to
70% of Eligible Accounts and (ii) as to distributor Accounts, an amount equal to
60% of Eligible Accounts, plus (b) 60% of Eligible Foreign Accounts, up to a
maximum amount of 20% to total domestic Eligible Accounts as determined by Bank
from Borrower's most recent Borrowing Base Certificate.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CASH MANAGEMENT MATURITY DATE" is March 18, 1999.
"CASH MANAGEMENT SERVICES FACILITY" means a credit extension of up to
$100,000 for purposes defined in Section 2.1.3.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"COMMITTED REVOLVING LINE" is an Advance of up to $12,500,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"COPYRIGHTS" are all copyright rights, applications or registrations and
like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.
"CREDIT EXTENSION" is each Advance, Letter of Credit, or any other
extension of credit by Bank for Borrower's benefit.
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"CURRENT LIABILITIES" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5.2;
but Bank may change eligibility standards by giving Borrower notice. Unless Bank
agrees otherwise in writing, Eligible Accounts will not include:
(a) Accounts that the account debtor has not paid and are more than
[ * ] days past the original due date, or more than [ * ] days past the
invoice date for such Account;
(b) Accounts for an account debtor, [ * ] or more of whose Accounts the
account debtor has not paid within the terms required as set forth in
the immediately preceding sub-paragraph (a);
(c) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed [ * ] of all Accounts, for the amounts
that exceed that percentage, unless the Bank approves in writing;
(d) Accounts for which the account debtor does not have its principal
place of business in the United States except for Eligible Foreign
Accounts;
(e) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality;
(f) Accounts for which Borrower owes the account debtor, but only up to
the amount owed (sometimes called "contra" accounts, accounts payable,
customer deposits or credit accounts);
(g) Accounts for demonstration or promotional equipment, or in which
goods are consigned, sales guaranteed, sale or return, sale on approval,
bill and hold, or other terms if account debtor's payment may be
conditional;
(h) Accounts for which the account debtor is Borrower's Affiliate,
officer, employee, or agent;
(i) Accounts in which the account debtor disputes liability or makes any
claim and Bank believes there may be a basis for dispute (but only up to
the disputed or claimed amount), or if the Account Debtor is subject to
an Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts for which Bank reasonably determines collection to be
doubtful.
"ELIGIBLE FOREIGN ACCOUNTS" are Accounts for which the account debtor
does not have its principal place of business in the United States but are
billed from within the United States and are subject to Eligible Accounts.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
*Confidential Treatment Requested
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"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INTELLECTUAL PROPERTY" is:
(a) Copyrights, Trademarks, Patents, and Mask Works including
amendments, renewals, extensions, and all licenses or other rights to use and
all license fees and royalties from the use;
(b) Any trade secrets and any intellectual property rights in computer
software and computer software products now or later existing, created, acquired
or held;
(c) All design rights which may be available to Borrower now or later
created, acquired or held;
(d) Any claims for damages (past, present or future) for infringement of
any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights
above;
All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.
"INVENTORY" is 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 later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LETTER OF CREDIT" means a letter of credit or similar undertaking
issued by Bank pursuant to Section 2.1.2.
"LIBOR RATE" is defined in the LIBOR Supplement to Agreement attached
hereto.
"LIBOR SUPPLEMENT TO AGREEMENT" means the agreement attached hereto as
Exhibit "B".
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including Letters of Credit and cash
management services and including interest
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accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.
"ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A.
"PATENTS" are patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues, extensions
and continuations-in-part of the same.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
19
<PAGE> 20
"PRIME RATE" is Bank's most recently accounced "prime rate", even if it
is not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of fewer than 12 months determined according to
GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is March 18, 1999.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) 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) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"TRADEMARKS" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.
BORROWER:
VISIONEER, INC.
By: /s/ GEOFFREY C. DARBY
-------------------------------------
Title: CFO
----------------------------------
BANK:
SILICON VALLEY BANK
By: /s/ M. KATHRYN LUNGARD
-------------------------------------
Title: SR. V.P.
----------------------------------
20
<PAGE> 1
EXHIBIT 10.33
LETTER OF AGREEMENT
The purpose of this Agreement is to establish terms and formalize
procedures pertaining to the sale of Visioneer products to Best Buy Co.,
Inc.. This agreement replaces all prior agreements and understandings
between the two companies. Reference to "Seller" or "Vendor" shall mean
Visioneer; reference to "Buyer" shall mean Best Buy Co., Inc.
I. GENERAL
The relationship between Visioneer and Best Buy Co., Inc. will begin on
the date this agreement is signed by an authorized representative of
Best Buy Co., Inc.. This agreement will control as to matters covered
herein and will continue unless and until termination. Either party may
terminate this agreement by giving the other party sixty (60) days
written notice of their request to terminate. Section III will survive
the termination of this agreement until all of Vendor's merchandise has
been sold. Section V.B. and V.C. will survive the termination of this
agreement until ninety (90) days following the sale to an end-user of
the last piece of Vendor's product.
II. PRICING AND PURCHASE ORDERS
A. PRICING, PRICE REDUCTIONS AND PRICE PROTECTION
For products not purchased through a Distributor, Vendor agrees
that all prices offered to Best Buy Co., Inc. will be no higher
than prices charges to any other reseller. Best Buy may audit
Vendor's pricing if Best Buy reasonably believes that Best Buy is
not receiving the lowest pricing. In the event Visioneer reduces
prices on its product carried by Best Buy Co., Inc., Vendor will
accept Best Buy Co., Inc.'s debit memo in an amount equal to the
price reduction times quantity on hand and in transit at the time
of the change. In the event of a price reduction for product
purchased through a distributor, Vendor will issue a credit to
the distributor, under the terms of Vendor's agreement with such
distributor.
B. PURCHASE ORDERS AND CONVEYANCE
Vendor agrees to be bound by the Purchase Order Terms and
Conditions set out in Exhibit 1 which is attached and
incorporated herein by reference. This applies regardless whether
orders are transmitted by delivery of a hard copy or by facsimile
transmission. Best Buy Co., Inc. agrees that if it revises those
Terms and Conditions, it will provide the text to the Vendor for
inspection prior to transmitting any additional purchase orders.
C. TERMS
1. Freight - All shipments to Best Buy Co., Inc. shall be
made F.O.B. origin; with title and risk of loss or
damage to pass to Best Buy Co., Inc. upon delivery by
Vendor to the common carrier, and insurance and handling
charges to be paid by Best Buy Co., Inc.. Vendor shall
bear all shipping charges for orders comprising one (1)
or more whole pallets shipped to a single location.
2. Credit Terms - Except for specially negotiated
purchases, Best Buy Co., Inc. will pay for ordered goods
within thirty (30) days of receipt of an invoice.
<PAGE> 2
3. Acceptance of debit memos - Vendor agrees to accept
debit memos issued by Best Buy Co., Inc. for price
protection, returns, Co-op/MDF and in fractions as
described in Best Buy Co., Inc.'s standard Purchase
Order Terms and Conditions in lieu of issuing Best Buy
Co., Inc. a credit. In the event Vendor disputes a debit
memo, Best Buy Co., Inc. agrees to provide sufficient
back-up detail supporting the debit memo within sixty
(60) days of Vendor request. Vendor must submit any
debit memo claims to Best Buy within sixty (60) of
receipt of the debit memo or shall otherwise be deemed
to have waived any such claims.
D. SELL-THROUGH DATA
Best Buy Co., Inc. shall provide product performance reports by
SKU no less frequently than weekly via electronics means to be
determined by Visioneer and Best Buy buyer. They will indicate
sales by SKU and store location, for the prior week and will
include on-hand inventory information. There is no charge to
receive this data. Best Buy will agree to provide Vendor with
electronic media of monthly sales out data by no less than zip
code.
III. VENDOR AUTHORIZATION
It is understood by parties that Vendor's products are authorized to be
sold by any Best Buy Co., Inc. location on the North American continent
regardless of geographic location.
IV. HARDWARE MODEL AND SOFTWARE VERSION CHANGES
Vendor will make best efforts to notify Best Buy Co., Inc. Merchandising
of all new releases and product replacements, at least thirty (30) days
prior to public announcement.
V. RETURNS/SELL THROUGH
A. STOCK BALANCE RETURNS
Best Buy Co., Inc. may exercise net returns of new goods once
each calendar quarter, equivalent to 10% of prior quarter's
purchases; at any time during each calendar quarter. Vendor will
accept Best Buy's debit memo for the quantity of product
authorized to be returned or the quantity of product actually
returned, whichever is less. At Best Buy Co., Inc.'s option,
Vendor will refund the net amount in cash (less any Co-op paid
for original purchases). If Vendor receives product in excess of
the authorized amount, the excess amount will be returned to Best
Buy Co., Inc. shipping location at Best Buy's expense for freight
and any handling charges that may be incurred; Vendor will issue
a debit memo to Best Buy Co., Inc. for these charges.
<PAGE> 3
B. CUSTOMER SATISFACTION RETURNS
Visioneer defines customer satisfaction returns as the return of
product with which a customer is not happy because it is
defective or not what the customer wanted and which is returned
to Best Buy within thirty (30) days of original end-user
purchase. If the product is new and has never been opened, Best
Buy Co., Inc. will return it to the shelf. If the product is not
resellable as new, the Vendor agrees to accept its return.
Returned products need to be substantially complete. That is, the
package must include the principle items and accessories
ordinarily included with the product from the Vendor. Vendor
agrees to accept customer satisfaction returns and to refund the
then current cost of goods to Best Buy Co., Inc. via debit memo
issued by Best Buy Co., Inc.
C. OUT-OF-BOX FAILURES
Vendor will automatically accept return of product that is
defective out of the box and returned by the end-user to Best Buy
Co., Inc. within a period of thirty (30) days after original
purchase date by end-user of new product. Any other defective
return requests will be considered on a case by case basis and
will require advance authorization from Vendor's customer
satisfaction and/or sales administration personnel.
VI. ADVERTISING AND MARKETING EFFORTS
A. RESPONSIBILITIES
Vendor shall have the responsibility for developing and accessing
demand for the Vendor's products and providing product
differentiation from competitive products. In pursuit of these
efforts, Vendor is encouraged to state in their advertising that
products are available at Best Buy Co., Inc. locations. Best Buy
Co., Inc. will be given the opportunity to pre-approve any use of
its name or logo in order to assure its image is maintained.
B. BEST BUY CO., INC. RESPONSIBILITIES
Best Buy Co., Inc.'s responsibilities are to take the appropriate
steps to cause customers to visit Best Buy locations, make a
pleasant and attractive retail environment conducive for the
purchase of the Vendor's product(s), to represent those products
in a positive and ethical manner and, in conjunction with
Vendor's marketing research recommendations, to purchase a supply
of the Vendor's products in adequate quantity to satisfy demand.
C. ACCOUNT REVIEWS
Regular account reviews play a valuable role in both parties
common objectives of selling more product to our mutual
customers. Best Buy Co., Inc. Buyers will make themselves
available for regular account reviews with its vendors. They may
be in person or via telephone. Requests for review should be
accompanied by an agenda.
Typical agenda might be:
- Review and analysis of past programs and promotions to
evaluate effectiveness
- Short, Medium and Long range product and programs
- Product performance - Inventory/Stock Levels,
Competitive Landscape
- Administrative Issues (Orders, Shipments, Payments,
etc.)
<PAGE> 4
D. RETAIL CO-OP PROGRAM
This section generally describes the marketing/sales program
relative to Best Buy Co., Inc.'s store-based retail business.
Vendor shall accept Best Buy Co., Inc.'s debit memo for five
percent (5%) based upon net receipts from the Vendor for coop
accrual. These funds shall be used strictly to:
- Support basic shelf merchandising of the Vendor's
products
- Cover the cost of line listing of Vendor's products in
Best Buy Co., Inc.'s retail catalog
- Newspaper ads as deemed appropriate by Best Buy Co.,
Inc.
- Inclusion of Vendor's products in Best Buy Co., Inc.
direct response marketing program
- Provide for the delivery of SKU performance data as
described in ll.D. above.
Marketing and/or sales development funds may be available on a
periodic basis at Visioneer's discretion in addition to accrued
coop funds.
Proof of performance - "Proof of performance" as it relates to
these four items shall be the responsibility of the Vendor. Best
Buy Co., Inc. will cooperate by 3roviding reasonable access to
advertising access tear sheets, copies of catalogs, etc.
Collection of funds - Best Buy Co., Inc. will collect the 5% coop
reimbursement via debit as described in II.C.3 above. It will be
collected regardless of whatever action the Vendor chooses to
take to verify use of these funds in the agreed upon manner.
Incremental marketing activities - Best Buy Co., Inc. may
periodically solicit its Vendors, from time to time, with offers
to participate in additional marketing activities for additional
costs.
VII. EMPLOYEE INCENTIVES
Vendor is prohibited from providing compensation, incentives, SPIFFS, or
gifts of any kind directly to Best Buy Co., Inc. employees without prior
written approval of a disinterested Best Buy Co., inc. officer.
Prohibited incentives would include, but not be limited to free product,
cash, meals or travel awards. Violations of this policy would constitute
grounds for the immediate discontinuance of the Vendor's product from
the Best Buy Co., Inc. line.
BEST BUY CO., INC. VISIONEER COMMUNICATIONS, INC.
By: Arnel De Jesus By: Murray Dennis
--------------------------------- --------------------------------
Signed: /s/ ARNEL DE JESUS Signed: /s/ MURRAY DENNIS
----------------------------- ----------------------------
Title: Sr. Buyer Title: V.P. Sales
------------------------------ -----------------------------
Date: 9/11/96 Date: 9/11/96
------------------------------- ------------------------------
<PAGE> 5
EXHIBIT I
PURCHASE ORDER TERMS AND CONDITIONS
1. ACCEPTANCE
This Purchase Order ("Order") constitutes Best Buy Co., Inc.'s offer and
SELLER'S acceptance and is expressly subject to the terms and conditions
in this Order unless otherwise agreed to in writing by an officer of
BUYER. Any provisions in SELLER'S invoices, billing statements,
acknowledgment forms or similar documents which are at variance with the
provision of this Order shall be of no force or effect unless
specifically agreed to in writing by an officer of BUYER. Any request or
demand for or statements purporting to make SELLER'S acceptance
conditional on BUYER'S assent to additional or different terms are
hereby rejected and shall be of no effect. Any of the following acts by
SELLER shall constitute acceptance of this Order and all of the terms
and conditions; signing and returning a copy of this Order; delivery of
any items ordered; informing the BUYER in any manner of commencement of
performance; or returning SELLER'S own form of acknowledgment. This
Order may not be changed or terminated verbally.
2. INVOICING
Each shipment must contain a packing slip showing Order number, number
of cartons and quantity in each carton. Unless otherwise specified in
the Order, the prices, in U.S. dollars, appearing herein shall include
packaging, crating and are firm for the delivery period shown. BUYER
shall be responsible for any federal and/or local taxes imposed by the
jurisdiction in which the items are delivered.
3. TERMS COMMENCEMENT
Any cash discount terms will begin upon date of receipt of the items or
invoice, whichever is later.
4. EXTRA CHARGES
BUYER shall pay no extra charges, including but not limited to charges
for prepacks, cartons, handling, or minimum Order or because of any
taxes or excises levied on manufacturers, wholesalers or otherwise,
unless agreed to in writing and signed by an officer of BUYER.
Merchandise shipped by freight or express will be packed, marked and
described so as to obtain the lowest rate possible under freight or
express classifications, except when otherwise specified by BUYER and
penalties or increased charges for failure to do so will be charged to
SELLER.
5. DELIVERY AND ACCEPTANCE OF ITEMS
The time specified for delivery of the items covered by this Order is of
the essence. All items will be subject BUYER Inspection at BUYER'S
receiving location. In addition to other rights provided by law, BUYER
reserves the right to cancel any unshipped portion of this Order, and to
reject all or part of items shipped hereunder, which: are defective in
material or workmanship; differ in any way from specifications or
warranties herein contained or implied by law; are shipped contrary to
instruction, not in recognized standard containers, or not on specified
shipping dates. SELLER shall have no right to cure such defects or
failure to perform after BUYER gives notice of cancellation. At its
option, BUYER may return rejected items or hold items at SELLER'S risk
and expense, and may in any event charge SELLER with cost of
transportation, shipping, unpacking, examining, recapping, reshipping,
and other like expenses. SELLER
<PAGE> 6
may not refuse any return so made, and shall be liable for all charges,
costs, expenses and consequential damages resulting from or arising out
of said refusal. In the event BUYER shall have made payments to SELLER
for items so returned, SELLER shall promptly refund such payments to
BUYER. Notwithstanding the foregoing: BUYER shall be under no duty to
inspect items prior to resale and neither retention nor resale of such
items shall be construed as an acceptance of items not in compliance
with the requirements of this Order.
A. MERCHANTABILITY. SELLER represents and warrants for a period
of ninety (90) days after end-user purchase that all items delivered
pursuant to this Order will, in addition to any express warranty or
guarantees heretofore or hereafter made by samples or other descriptions
previously furnished by SELLER be free from any defect in material or
workmanship, be merchantable at the time of delivery to BUYER and at the
time of use by BUYER'S customers and be fit and safe for sale and any
use by BUYER, or its customers for which such items are ordinarily
intended and any particular intended use for which SELLER or its agents
should have or do have knowledge of. SELLER will maintain and carry
liability insurance which includes but is not limited to employer's
liability, workers compensation, general liability, public liability,
property damage liability, product liability, and contract liability in
amounts set forth or incorporated in this order, with insurance carriers
acceptable to BUYER and if no amounts are so set forth herein, amounts
as acceptable to and approved by the BUYER, but in no event shall such
amounts be less than minimum statutory requirements, if any. SELLER
will, at BUYER'S request, furnish certificates of insurance from its
carrier on the foregoing coverage's, which shall provide that such
coverage shall not be reduced without thirty (30) days advance written
notification to the BUYER from the carrier.
B. GOVERNMENTAL REQUIREMENTS. SELLER represents and warrants that
all items; delivered pursuant to this Order are manufactured in
compliance with and meet the standards of United States Consumer Product
Safety Act ("CPSA") and the rules, regulations and standards of the
United States Consumer Product Safety Commission; furnished hereunder
which are produced in the United States will be produced in compliance
with the applicable requirements of the Fair Labor Standards Act of
1938, as amended to the sale hereof, and regulations and orders of the
United States Department of Labor issued under Section 14 thereof, and
that all provisions of Executive Order as amended, 4 1 CFR60-250 and 4 1
CFR60-741 are incorporated by reference herein as though set forth in
full; are manufactured, sold, shipped, packaged, labeled, tagged and
invoiced in compliance with all applicable federal, national, state, and
local laws, statutes, rules, regulations or ordinances, including but
not limited to the Consumer Packaging and Labeling Act, the Hazardous
Products Act, the National Trademark and True Labeling Act and the Food
and Drug Act and all other warrants that it will, upon written demand,
furnish BUYER with Material Safety Data Sheets ("MSDS'S") for items
furnished hereunder. Said MSDS's are to comply with requirements of
Federal and State Right to Know Laws and Occupational Safety and Health
Acts.
C. ANTITRUST. SELLER represents and warrants that the prices
hereunder on the items covered by this Order are lawful under all
applicable laws and regulations, including but not limited to Section 2
of the Clayton Antitrust Act, as amended by the Robinson-Patman Act, and
further specifically, expressly, and unconditionally represents and
warrants to BUYER that any and all payments or allowances to be made to
BUYER by SELLER for services or facilities to be furnished by SELLER are
on proportionally equal terms to other similar customers of SELLER
competing with BUYER in the description of the same item.
<PAGE> 7
6. PATENT INDEMNITY
A. REPRESENTATIONS. SELLER represents and warrants that:
1. It has the right to disclose or use, without
liability to others, all processes, designs and methods the
SELLER will disclose or use in performance of this Order.
2. The items, and BUYER'S use thereof, do not and will
not infringe on any U.S. patent, trademark, trade name, service
mark, trade secret, mask work, copyright, design or any other
proprietary right of others and
3. In connection with its performance under this Order,
SELLER will not knowingly infringe on any U.S. patent,
trademark, trade name, service mark, trade secret, mask work,
copyright, design or any other proprietary right of a third
party.
B. INDEMNITY BY SELLER. SELLER will indemnify, hold harmless, and
at BUYER'S request, defend BUYER and BUYER'S subsidiaries,
affiliates, and customers from and against any loss, or liability
or expense (including court costs and reasonable legal fees)
arising out of or resulting from any breach or alleged breach of
the above representations or from any claim that BUYER's use,
sale or other disposition of the items purchased hereunder
infringes on any U.S. patent, trademark, trade name, service
mark, trade secret, mask work, copyright, design or any other
proprietary property of any third party. In the event of any such
claim, BUYER agrees (i) to notify SELLER of claim, (ii) if BUYER
has not requested that SELLER defend the claim, to permit SELLER,
at SELLER's expense to participate in the defense thereof with
counsel of SELLER'S choosing, subject to BUYER'S participation
and supervision, and (iii) if BUYER has requested that SELLER
defend the claim, to provide SELLER with all needed information,
assistance and authority necessary for SELLER to do so. If the
use by BUYER or any of its customers of any of the items
purchased under this Order is enjoined, or in BUYER'S opinion is
likely to be enjoined, at BUYER'S request and option, and without
prejudice to BUYER'S rights and remedies SELLER at its expense
will: (1) procure from the person or persons claiming or likely
to claim infringement, a license for BUYER and its customers to
continue to use such items; or (2) modify such items to avoid the
infringement, a license for BUYER and its performance or
compliance with BUYER'S specifications on this Order; or (3)
refund to BUYER the net amounts paid by BUYER, less applicable
discounts and credits for infringing items returned at Seller's
expense by BUYER to SELLER.
7. PRICE PROTECTION
SELLER represents and warrants on date of this Order, that the prices
charged for the items covered by this Order will be as low as the lowest
prices charges by SELLER to any similar customers purchasing such items
in similar quantities and under like circumstances. This Order is not to
be filled at a higher price than shown on the Order unless authorized in
writing by an officer of BUYER. Should there be a SELLER imposed
reduction in price between the date of this Order and the delivery date
specified in this Order or the actual delivery date, whichever is later,
BUYER may charge back to SELLER'S account the amount of decline on any
items on hand or in transit at the time of the price reduction.
<PAGE> 8
8. TERMINATION
At its option, BUYER may terminate all or part of this Order for any
reason, within 24 hours prior to SELLER'S scheduled shipment to BUYER,
upon prior written notification being faxed, telexed or mailed to
SELLER, which is received no later than 24 hours prior to scheduled
shipment; such termination shall be at no charge, cost or expense to
BUYER.
9. FORCE MAJEURE
Neither BUYER nor SELLER shall be liable for any failure to perform in
accordance with the terms of this Order due to wars, strikes, fires,
acts of God or the public enemy, labor difficulties, freight embargoes
or other causes beyond their control. In the event SELLER is unable to
perform due to any of the foregoing events, BUYER shall be entitled,
except for BUYER'S monetary obligation under this Agreement and, in
addition to its right to terminate pursuant to paragraph 9; to (a)
reduce pro lento, and without any obligation to SELLER, the quantity of
items specified by this Order.
10. WAIVER
No course of dealing of BUYER nor any delay or omission of BUYER to
exercise any right or remedy under this Order shall operate as a waiver
of any rights of BUYER, and every right and remedy of BUYER provided
herein shall be cumulative and concurrent, unless otherwise expressly
provided herein, and shall be in addition to every other right or remedy
provided for herein or now or hereafter existing in law or equity. In
the event BUYER waives any term or condition, such waiver shall not
constitute a waiver of the same terms or conditions in prior or
subsequent transactions or different terms or conditions in the same,
prior or subsequent transactions.
11. ASSIGNMENT
Neither party may assign or transfer any of the rights, duties, or
obligations herein without the prior written consent of the other, and
any purported attempt to do so shall be null and void. Notwithstanding
anything set forth above, BUYER or SELLER may assign or transfer its
rights, duties and obligations under this Agreement to a subsidiary or
Affiliate; in the case of SELLER, to a subsidiary or affiliate of
SELLER, or, in the case of Buyer or Seller, to a third party in
connection with the merger, sale, consolidation or transfer of
substantially all of such party's assets or stock, provided that such
third party is not a competitor of the non-assigning party. The
provisions of this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and permitted assigns.
12. SEVERABILITY
If any provisions of this Order is found to be illegal or otherwise
unenforceable by any court or other judicial or administrative body, it
shall be severed and the remaining provision of this Order shall remain
in full force and effect.
13. ENTIRE AGREEMENT
This document contains the entire agreement of the parties upon the
subject matter hereof. There is no agreement, oral or otherwise, which
is not set forth in writing. No modifications of this agreement shall be
binding unless in writing and signed by both parties.
<PAGE> 9
14. SERVICE OR PROCESS
This Agreement shall be governed by the laws of the State of Delaware.
15. ADDITIONAL REMEDIES
The rights and remedies herein expressly provided shall be in addition
to any other rights and remedies given by law or equity.
16. JURISDICTION
Except as otherwise specifically provided in this contract, any dispute
concerning a question of fact and/or law arising under this Order which
is not disposed of by agreement of the parties, shall be decided by a
court of competent jurisdiction in the United States District Courts in
the Northern District of California or in the Superior Court in Santa
Clara County if Visioneer sues; jurisdiction in State of Delaware courts
if Best Buy Co., Inc. sues. Pending settlement or final decisions of any
dispute, the SELLER shall proceed diligently with the performance of
this Order in accordance with the directions of the BUYER.
17. SURVIVAL
The terms, provisions, representations, and warranties contained in this
Order shall survive the delivery of the items, payment of the purchase
price and transfer of title.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET, CONDENSED STATEMENT OF OPERATIONS AND CONDENSED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,922
<SECURITIES> 2,674
<RECEIVABLES> 19,394
<ALLOWANCES> 5,095
<INVENTORY> 4,258
<CURRENT-ASSETS> 33,786
<PP&E> 1,986
<DEPRECIATION> 514
<TOTAL-ASSETS> 35,837
<CURRENT-LIABILITIES> 24,262
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 11,430
<TOTAL-LIABILITY-AND-EQUITY> 35,837
<SALES> 19,965
<TOTAL-REVENUES> 19,965
<CGS> 14,169
<TOTAL-COSTS> 14,169
<OTHER-EXPENSES> 5,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (237)
<INCOME-PRETAX> 335
<INCOME-TAX> 0
<INCOME-CONTINUING> 335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
