<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________TO _________
COMMISSION FILE NUMBER: 0-22689
----------------------------------
SCM MICROSYSTEMS, INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0444317
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER)
131 ALBRIGHT WAY, LOS GATOS, CA 95032
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(408) 370-4888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT)
------------------------------------
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
At November 6, 1997, 10,624,584 shares of common stock were outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SCM MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Security and access products $ 7,952 $ 4,927 $ 17,772 $ 10,716
PCMCIA peripheral products -- 1,073 163 3,797
-------- -------- -------- --------
Total net sales 7,952 6,000 17,935 14,513
Cost of sales 5,108 3,903 11,234 10,074
-------- -------- -------- --------
Gross profit 2,844 2,097 6,701 4,439
-------- -------- -------- --------
Operating expenses:
Research and development 713 598 2,131 1,778
Sales and marketing 928 889 2,941 2,297
General and administrative 597 605 1,730 1,513
Settlement of patent claim 515 -- 515 --
-------- -------- -------- --------
Total operating expenses 2,753 2,092 7,317 5,588
-------- -------- -------- --------
Income (loss) from operations 91 5 (616) (1,149)
Interest and other income (expense), net 111 (70) 169 (218)
Foreign currency transaction gains 162 92 401 148
-------- -------- -------- --------
Income (loss) before income taxes 364 27 (46) (1,219)
Provision for income taxes 30 -- 30 --
-------- -------- -------- --------
Net income (loss) 334 27 (76) (1,219)
Accretion on redeemable convertible preferred stock (324) (72) (802) (215)
-------- -------- -------- --------
Net income (loss) attributable to common stockholders $ 10 $ (45) $ (878) $ (1,434)
======== ======== ======== ========
Earnings (loss) per share:
Net income (loss) $ 0.05 $ 0.01 $ (0.01) $ (0.23)
======== ======== ======== ========
Net income (loss) attributable to common stockholders $ 0.00 $ (0.01) $ (0.13) $ (0.27)
======== ======== ======== ========
Shares used in computing earnings (loss) per share 7,340 5,361 6,926 5,218
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE> 3
SCM MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,171 $ 2,593
Accounts receivable 7,837 5,237
Inventories 3,487 2,279
Prepaids and other current assets 786 519
------- -------
Total current assets 22,281 10,628
Property, equipment, and other assets, net 996 831
======= =======
$23,277 $11,459
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable 2,286 8,246
Accounts payable 4,599 3,351
Accrued expenses 1,246 818
-------- --------
Total current liabilities 8,131 12,415
Redeemable convertible preferred stock 22,147 5,068
Stockholders' deficit:
Capital Stock 3 2
Additional paid-in capital 2,899 2,387
Accumulated deficit (8,893) (8,015)
Deferred compensation (172) (224)
Cumulative translation adjustment (838) (174)
-------- --------
Total stockholders' deficit (7,001) (6,024)
-------- --------
$ 23,277 $ 11,459
======== ========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 4
SCM MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
ENDED SEPT. 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (76) $ (1,219)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 266 186
Amortization of deferred employee compensation 52 --
Non-cash charges from issuance of warrants 493 --
Changes in operating assets and liabilities:
Accounts receivable (2,993) (1,422)
Inventories (1,264) (234)
Prepaid expenses (463) (313)
Accounts payable 1,637 1,118
Accrued expenses 423 280
-------- --------
Net cash used in operating activities (1,925) (1,604)
-------- --------
Cash flows used in investing activities - capital expenditures (497) (442)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable -- 3,457
Payments on notes payable (1,309) (1,712)
Principal payments on long-term debt (63) (1)
Proceeds from issuance of redeemable
convertible Preferred Stock 12,148 --
Proceeds from issuance of common stock, net -- 28
Proceeds from line of credit -- 1,000
-------- --------
Net cash provided by financing activities 10,776 2,772
-------- --------
Effect of exchange rates on cash (776) (180)
-------- --------
Net increase in cash 7,578 546
Cash at beginnning of period 2,593 739
-------- --------
Cash at end of period $ 10,171 $ 1,285
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period - interest $ 96 $ 217
======== ========
Noncash financing activities:
Interest accretion on redeemable convertible
Preferred Stock $ 802 $ 215
======== ========
Conversion of related party and non-related party debt
into redeemable convertible Preferred Stock $ 4,240 $ --
======== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
SCM MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered for a fair presentation have been included. Operating results
for the three month and nine month periods ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the
financial statements and footnotes thereto for the year ended December 31,
1996 included in the Company's Form S-1 filed with the Securities and
Exchange Commission on October 3, 1997.
2. PROVISION FOR INCOME TAXES
The Company's effective tax rate was 8.2% for the quarter ended September
30, 1997. This tax rate includes the effect of net operating losses (NOLs)
carried forward from prior periods.
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using net income (loss), and is
based on the weighted average number of shares of common stock outstanding
and common equivalent shares from stock options (under the treasury stock
method, if dilutive) and convertible preferred stock on as "as converted"
basis. In accordance with SEC Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within
12 months of the Company's October 1997 initial public offering of Common
Stock ("IPO") for all periods presented.
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS
No. 128 requires the presentation of basic earnings per share (EPS) and,
for companies with complex capital structures, diluted EPS. SFAS No. 128
is effective for annual and interim periods ending after December 15,
1997. The Company expects that for profitable periods basic EPS will be
higher than EPS as presented in the accompanying financial statements and
diluted EPS will not differ materially from EPS as presented in the
accompanying financial statements. Computations for loss periods should
not change significantly.
4. SUBSEQUENT EVENTS
In October 1997, the Company completed its IPO with the sale of 3.8
million shares of Common Stock at a price to the public of $13.00 per
share. Additionally in October, the Company sold 200,000 shares of Common
Stock to a third party at $9.00 per share pursuant to a patent
infringement settlement agreement between the two companies which was
executed on September 4, 1997. The net proceeds to the Company from these
two transactions approximated $45.8 million.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this section as well as those discussed under the
caption "Factors That May Affect Future Operating Results."
OVERVIEW
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
security and access products are targeted at OEM computer, telecommunication and
digital video broadcasting ("DVB") component and system manufacturers. The
Company markets, sells and licenses its products through a direct sales and
marketing organization primarily to OEMs and also through distributors, VARs,
system integrators and resellers worldwide.
From the Company's inception through 1994, the Company focused primarily
on PCMCIA peripheral products, including flash memory and fax/modem devices,
which carried a significantly lower gross margin than the Company's current
products. In 1994, the Company began emphasizing security and access products.
The Company made the final shipment of PCMCIA peripheral products in the quarter
ended March 31, 1997, completing its exit from this business.
The Company experiences substantial seasonality in its business, with
approximately one-third of annual net sales being realized in the first half of
the year and the remaining two-thirds being realized in the second half of the
year. In recent periods, this seasonality has been primarily the result of the
Company's reliance on sales of its SwapBox products to OEMs that in turn are
selling to U.S. government agencies. The buying pattern of U.S. government
agencies tend to be substantially weighted to the third quarter and, to a
somewhat lesser extent, the fourth quarter of the calendar year. The strength in
net sales in the third quarter which results from the U.S. government buying
patterns is somewhat offset by relatively weaker sales in Europe in the same
quarter as a result of the traditional European summer vacation patterns. The
Company expects that as sales of its DVB products, which are sold to OEMs mainly
in Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as such sales are likely to be strongest in the fourth quarter of the year. In
contrast to net sales, operating expenses tend to be spread relatively evenly
across the year. As a result, the Company's operating results have tended to be
weakest in first and second quarter of the year.
In April 1997, Gemplus served the Company with a complaint alleging that
the Company's SwapSmart product infringes certain claims of a French patent held
by Gemplus. In September 1997, the Company entered into a license agreement and
memorandum of
<PAGE> 7
understanding, and settled this dispute, with Gemplus. In connection with these
transactions, the Company issued warrants to Gemplus to purchase up to 200,000
shares of Common Stock at an exercise price of $13.00 per share and up to
200,000 shares of Common Stock at an exercise price of $14.00 per share. The
Company also agreed to sell 200,000 shares of Common Stock to Gemplus at a
purchase price of $9.00 per share. The Company's operating expenses for the
quarter ended September 30, 1997 include a one-time expense of approximately
$515,000 in connection with the foregoing agreements, approximately $453,000 of
which is non-cash consideration associated with the warrants.
RESULTS OF OPERATIONS
Net Sales. Net sales reflect the invoiced amount for goods shipped less
estimated returns. Revenue is recognized upon product shipment. Net sales for
the Company's quarter ended September 30, 1997 were $8.0 million compared to
$6.0 million in the third quarter of 1996, an increase of 33%. For the first
nine months of 1997, net sales were $17.9 million compared to $14.5 million in
the first nine months of 1996, an increase of 24%. Sales of security and access
products were $8.0 million and $17.8 million in the third quarter and first nine
months of 1997, respectively, compared to $4.9 million and $10.7 million for the
comparable periods of 1996. This represents year-over-year growth rates for
security and access products of 61% and 66% for the third quarter and nine month
periods, respectively. The increases in each period were primarily due to the
introduction of the Company's DVB conditional access module (CAM) products,
which commenced shipment in the fourth quarter of 1996. The Company made the
final shipment of PCMCIA peripheral products in the quarter ended March 31,
1997, completing its exit from this business.
Gross Profit. Gross profit for the third quarter of 1997 was $2.8 million,
or 36% of total net sales, compared to $2.1 million, or 35% of total net sales
for the third quarter of 1996. Gross profit for the first nine months of 1997
was $6.7 million, or 37% of total net sales, compared to $4.4 million, or 31% of
total net sales for the first nine months of 1996. The increase in gross profit,
both in absolute amount and as a percentage of total net sales, was primarily
due to the aforementioned introduction of DVB-CAM products and the concurrent
business shift away from lower margin PCMCIA peripheral products. In addition,
the Company's transition from the PCMCIA peripheral products business resulted
in reduced labor requirements. The Company believes that its gross profit during
1997 will continue to be above the levels experienced in 1996. The Company's
gross profit has been and will continue to be affected by a variety of factors,
including competition, product configuration and mix, the availability of new
products and product enhancements which tend to carry higher gross profit than
older products and the cost and availability of components. Accordingly, gross
profits are expected to fluctuate from period to period.
Research and Development. Research and development expenses consist
primarily of employee compensation and prototype expenses. To date, the period
between achieving technological feasibility and completion of software has been
short, and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs. Research and development expenses for the third
<PAGE> 8
quarter of 1997 were $713,000, compared with $598,000 in the third quarter of
1996, an increase of 19%. As a percentage of total net sales, research and
development expenses were 9% and 10% in the third quarter of 1997 and 1996,
respectively. For the first nine months of 1997, research and development
expenses were $2.1 million, compared with $1.8 million in the comparable period
of 1996, an increase of 20%. As a percentage of total net sales, research and
development expenses were 12% in the nine month periods in both 1997 and 1996.
These increases for the third quarter and nine month periods in absolute amounts
were due primarily to higher headcount in the Company's La Ciotat, France
facility and a rise in prototype and related expenses for the Company's DVB-CAM
product development. The Company believes that research and development expenses
during the fourth quarter of 1997 will be higher than the fourth quarter of
1996, due to a higher number of personnel involved in the Company's new product
development and customer projects.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee compensation and trade show and other marketing costs. Sales and
marketing expenses for the third quarter of 1997 were $928,000, compared with
$889,000 in the third quarter of 1996, an increase of 4%. For the first nine
months of 1997, sales and marketing expenses were $2.9 million, compared with
$2.3 million in the comparable period of 1996, an increase of 28%. As a
percentage of total net sales, these expenses were 12% and 16% in the third
quarter and first nine months of 1997, compared with 15% and 16% of total net
sales in the comparable periods of 1996. These increases in absolute amounts
were due primarily to growth of the Company's sales and marketing headcount in
the U.S. and initial promotional efforts in the Asia-Pacific regions. The
decrease in sales and marketing expenses as a percentage of total net sales in
the third quarter of 1997 compared to the third quarter of 1996 was due to the
33% increase in total net sales discussed above. Sales and marketing expenses in
the fourth quarter of 1997 are expected to increase in absolute amounts as the
Company continues to expand its sales and business development efforts, but to
generally remain consistent with or decline slightly from the 1996 results as a
percentage of total net sales.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing the Company's
administrative functions. General and administrative expenses were $597,000 in
the third quarter of 1997, or 8% of total net sales, compared with $605,000, or
10% of total net sales in the third quarter of 1996. For the nine month period,
general and administrative expenses were $1.7 million in 1997, an increase of
14% compared with $1.5 million in 1996, representing 10% of total net sales in
both nine month periods. General and administrative expenses increased in
absolute amount in the first nine months of 1997 primarily as a result of an
increase of administrative headcount in the Company's U.S. and Pfaffenhofen,
Germany offices to support higher levels of business activities. The Company
believes general and administrative expenses in 1997 will continue to increase
in absolute amount as a result of operating as a public company.
Settlement of Patent Claim. In September 1997, the Company settled a
patent infringement claim with a third party. In connection therewith, the
Company incurred a one-time charge of $515,000, of which $453,000 was a non-cash
charge related to the imputed cost of warrants issued.
<PAGE> 9
Interest and Other Income (Expense), Net. Interest and other income
(expense), net consists of interest earned on invested cash, offset by interest
paid or accrued on outstanding debt. In the third quarter and first nine months
of 1997, net investment income was $111,000 and $169,000, respectively. During
the comparable periods of 1996, the Company incurred $70,000 and $218,000 of
interest expense on outstanding debt. During the first six months of 1997, the
Company raised $12.1 million through the sale of preferred stock, resulting in a
reduction of debt and corresponding interest expense and investable cash
balances. In future periods, the Company expects net interest income to increase
due to the investment of the proceeds of the Company's IPO received in October
1997.
Income Taxes. A provision for income taxes of $30,000 was booked in the
third quarter of 1997, relating primarily to anticipated alternative minimum tax
requirements. As of December 31, 1996, the Company had German net operating loss
carry forwards of approximately $4.6 million available for an indefinite period
to offset income from the Company's German operations. In addition, the Company
had operating loss carry forwards of approximately $1.9 million and $800,000 for
United States federal and California income tax purposes, respectively. The
Company's utilization of United States federal operating loss carry forwards is
limited to approximately $340,000 per year.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's IPO in October of 1997, the Company had financed
its operations principally through private placements of debt and equity
securities and, to a lesser extent, borrowings under bank lines of credit. As of
September 30, 1997, the Company's working capital was $14.1 million, compared to
a working capital deficit of $1.8 million as of December 31, 1996. Working
capital increased during the first nine months of 1997 due primarily to the
Company's receipt of $12.1 million in net proceeds from the private placement of
redeemable convertible preferred stock and the conversion of approximately $4.2
million of notes payable into redeemable convertible preferred stock.
In October 1997, the Company completed its IPO with the sale of 3.8
million shares of Common Stock at a price to the public of $13.00 per share.
Additionally in October, the Company sold 200,000 shares of Common Stock to
Gemplus at $9.00 per share pursuant to a patent infringement settlement
agreement between the companies which was executed on September 4, 1997. The net
proceeds to the Company from these two transactions approximated $45.8 million,
raising its cash and cash equivalents to $55.6 million as of September 30, 1997
on a pro forma basis.
The Company maintains its current excess cash balances in a variety of
interest bearing investment-grade financial investments such as U.S. treasury,
federal agency and state government securities, and corporate debt and bank
certificates of deposit. Principal preservation, liquidity and safety are the
primary investment objectives.
During the first nine months of 1997, cash and cash equivalents increased
by $7.6 million due primarily to financing activities which included preferred
stock sales totaling $12.1 million,
<PAGE> 10
partially offset by repayments of short- and long-term debt of $1.4 million.
Investing activities in the first nine months of 1997 consisted of $497,000 in
capital equipment expenditures. Operating activities in the period used $1.9
million of cash, including increases in receivables and inventories of $3.0
million and $1.3 million, respectively, due primarily to higher revenue and
backlog levels, partially offset by a $1.6 million increase in accounts payable.
The Company has revolving lines of credit with three banks in Germany
providing total borrowings of up to 4.5 million DM (approximately $2.5 million
at September 30, 1997). One of these lines expired as of September 30, 1997, and
the Company and the bank are in negotiations to extend such line for an
additional 12 month period. The remaining two German lines of credit expire on
March 31, 1998. The German lines of credit bear interest at rates ranging from
8.0% to 8.75%. Borrowings under the German lines of credit are unsecured. The
Company also has a $3.0 million U.S. line of credit which is secured by all
assets of the Company, bears interest at the bank's prime rate, and expires in
May 1999. At September 30, 1997, no amounts were outstanding under any of the
Company's lines of credit. In addition to the lines of credit, the Company had
outstanding debt at September 30, 1997 totaling approximately $2.3 million,
consisting of a term loan from a German bank. This debt bears interest at rates
ranging from 5.0% to 6.0%. The Company expects to repay this term loan in the
fourth quarter of 1997. As of September 30, 1997, the Company had no material
commitments for capital expenditures.
The Company presently expects that its current capital resources and
available borrowings should be sufficient to meet its operating and capital
requirements through at least the end of 1999. The Company may, however, seek
additional debt or equity financing prior to that time. There can be no
assurance that additional capital will be available to the Company on favorable
terms or at all. The sale of additional debt or equity securities may cause
dilution to existing stockholders.
<PAGE> 11
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS;
SEASONALITY
Although the Company was profitable for the fiscal quarter ended September
30, 1997, the Company incurred a net loss of $410,000 for the six months ended
June 30, 1997 and net operating losses on an annual basis since its inception in
1993. As of September 30, 1997, the Company had an accumulated deficit of $8.9
million. In view of the Company's loss history, there can be no assurance that
the Company will be able to achieve or sustain profitability on an annual or
quarterly basis in the future.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly. Factors affecting operating results include:
the level of competition; the size, timing, cancellation or rescheduling of
significant orders; market acceptance of new products and product enhancements;
new product announcements or introductions by the Company or its competitors;
adoption of new technologies and standards; changes in pricing by the Company or
its competitors; the ability of the Company to develop, introduce and market new
products and product enhancements on a timely basis, if at all; hardware
component costs and availability, particularly with respect to hardware
components obtained from sole or limited source suppliers; the Company's success
in expanding its sales and marketing organization and programs; technological
changes in the market for digital information security products; levels of
expenditures on research and development; foreign currency exchange rates; and
general economic trends. In addition, because a high percentage of the Company's
operating expenses are fixed, a small variation in revenue can cause significant
variations in operating results from quarter to quarter.
Initial sales of the Company's products to a new customer typically
involve a sales cycle which can range from six to nine months during which the
Company may expend substantial financial resources and management time and
effort with no assurance that a sale will ultimately result. The length of the
sales cycle may vary depending on a number of factors over which the Company may
have little or no control, including product and technical requirements, and the
level of competition which the Company encounters in its selling activities. Any
delays in the sales cycle for new customers could have a material adverse effect
on the Company's business and operating results.
Based upon the factors enumerated above, the Company believes that its
operating results may vary significantly in future periods and that historical
results are not reliable indicators of future performance. It is likely that, in
some future quarter or quarters, the Company's operating results will be below
the expectations of stock market analysts and investors. In such event, the
market price of the Company's Common Stock could decline significantly.
<PAGE> 12
DEPENDENCE ON EMERGING PRODUCT MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE OF
THE COMPANY'S PRODUCTS
From the Company's inception through 1994, the Company focused on PCMCIA
peripheral products, including flash memory and fax/modem devices. In 1994, the
Company began emphasizing security and access products. The Company made the
final shipment of PCMCIA peripheral products in the quarter ended March 31,
1997, completing its exit from this business. As a result of the Company's
strategic shift in product focus, the proportion of security and access product
sales increased from 22.1% of total net sales in 1994 to 77.3% of total net
sales in 1996, and to 99.1% of total net sales in the first nine months of 1997.
The Company's net sales are now and will continue to be dependent upon the
success of its security and access products.
The Company's future growth and operating results will depend to a large
extent on the successful marketing and commercial viability of the Company's
security and access product families. Each of these product families addresses
needs in different emerging markets. Smart card token-based security
applications are able to provide protection from unauthorized access to digital
information. The Company believes that smart cards are ideally suited to serve
as tokens for network and electronic commerce security. Accordingly, the
Company's SwapBox and SwapSmart product families are designed to provide smart
card token-based security for PCs. However, there can be no assurance that the
smart card will become the industry standard for network and electronic commerce
security applications. The Company's DVB product family provides a means of
controlling access to digital television broadcasts. The Company's SwapAccess
DVB-CAM product implements the DVB-CI and NRSS-B standards. To date, the
Company's DVB-CAM product has been implemented in a relatively limited number of
DVB set-top boxes in Europe. Although the Company believes that the DVB-CI
standard will eventually become the European standard for DVB conditional access
applications, there can be no assurance that the standard will be adopted, that
the European DVB market will further develop or that even if such standard is
adopted and the market further develops, the Company's DVB-CAM products will be
widely adopted. Furthermore, the market for DVB products in the United States
has only recently begun to develop. While the NRSS Committee has proposed the
NRSS-B standard for use in the United States, there can be no assurance that
this standard will be adopted as currently proposed or at all. Moreover, even if
this or another standard is adopted, there can be no assurance whether, or to
what extent, the United States DVB market will grow. In addition, the
substantial installed base of analog set-top boxes in the United States may
cause the market for DVB products in general, and the Company's SwapAccess
products in particular, to grow slower than expected, if at all.
If the market for the products described above or any of the Company's
other products fails to develop or develops more slowly than expected or if any
of the standards supported by the Company do not achieve or sustain market
acceptance, the Company's business and operating results would be materially and
adversely affected.
<PAGE> 13
DEPENDENCE ON SALES TO OEMs
A substantial majority of the Company's products are intended for use as
components or subsystems in systems manufactured and sold by third party OEMs.
In 1996, almost all of the Company's sales were to OEMs and the Company expects
this dependence on OEM sales to continue. In 1996, sales to IBM accounted for
12% of total net sales, sales to BetaDigital (a division of the Kirch Group)
accounted for 11% of total net sales and sales to the Company's top 10 customers
(all of which are OEMs) accounted for 55% of total net sales. In the first nine
months of 1997, sales to BetaDigital accounted for 37% of total net sales, sales
to Telenor Conax A.S. accounted for 12% of total net sales, and sales to the
Company's top 10 customers (eight of which are OEMs) accounted for 76% of total
net sales. In order for an OEM to incorporate the Company's products into its
systems, the Company must demonstrate that its products provide significant
commercial advantages to OEMs over competing products. There can be no assurance
that the Company can successfully demonstrate such advantages or that the
Company's products will continue to provide any advantages. Moreover, even if
the Company is able to demonstrate such advantages, there can be no assurance
that OEMs will elect to incorporate the Company's products into their current or
future systems. Further, the business strategies and manufacturing practices of
the Company's OEM customers are subject to change and any such change may result
in decisions by the customers to decrease their purchases of the Company's
products, seek other sources for products currently manufactured by the Company
or manufacture these products internally. The Company's OEM customers may also
seek price concessions from the Company. Failure of OEMs to incorporate the
Company's products into their systems, the failure of such OEMs' systems to
achieve market acceptance or any other event causing a decline in the Company's
sales to OEMs would have a material adverse effect on the Company's business and
operating results.
DEPENDENCE ON SALES TO GOVERNMENT CONTRACTORS
Approximately 51%, 39% and 31% of the Company's net sales during 1995,
1996 and the first nine months of 1997, respectively, were derived from sales of
the Company's SwapBox product for use by the U.S. government, all of which were
made under contracts between the Company and major OEMs that sell PCs to the
United States Department of Defense (the "DoD"). The Company believes that
indirect sales to the DoD are subject to a number of significant uncertainties,
including timing and availability of funding, unforeseen changes in the timing
and quantity of government orders and the competitive nature of government
contracting generally. Furthermore, the DoD has been reducing total expenditures
over the past few years in a number of areas and there can be no assurance that
such funding will not be reduced in the future. In addition, there is no
assurance that the Company will be able to modify existing products or develop
new products that will continue to meet the specifications of OEM suppliers to
the DoD. A significant loss of indirect sales to the U.S. government would have
a material adverse effect on the Company's business and operating results.
DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS
The Company is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company has formed
strategic relationships, including
<PAGE> 14
technology sharing agreements, with a number of key industry players such as
Intel, France Telecom and Telenor. In addition, Intel and Telenor made equity
investments in the Company of $2.0 million and $5.5 million, respectively, in
early 1997. The Company evaluates, on an ongoing basis, potential strategic
alliances and intends to continue to pursue such relationships. The Company's
future success will depend significantly on the success of its current
arrangements and its ability to establish additional arrangements. There can be
no assurance that these arrangements will result in commercially successful
products.
COMPETITION
The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronics in PC Card adapters; (ii)
Gemplus, Hitachi and Toshiba in smart card readers and universal smart card
reader interfaces; and (iii) Gemplus in DVB-CAM modules. The Company also
experiences indirect competition from certain of its customers which currently
offer alternative products or are expected to introduce competitive products in
the future. The Company may in the future face competition from these and other
parties including new entrants, such as Motorola, that develop digital
information security products based upon approaches similar to or different from
those employed by the Company. In addition, there can be no assurance that the
market for digital data security and access control products will not ultimately
be dominated by approaches other than the approach marketed by the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, or may be
able to devote greater resources to the development, promotion and sale of
products, or to deliver competitive products at a lower end user price. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could have a material adverse effect on the Company's
business and operating results.
The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels; and price. There can be no assurance that the Company will be able to
compete as to these or other factors or that competitive pressures faced by the
Company will not materially and adversely affect its business and operating
results.
<PAGE> 15
MANAGEMENT OF GROWTH
The Company's business has grown substantially in recent periods, with net
sales increasing from $6.4 million in 1994 to $21.5 million in 1996, and to
$17.9 million in the first nine months of 1997. The growth of the Company's
business has placed a significant strain on the Company's management and
operations. In addition, a number of key members of the Company's management,
including its President and Chief Executive Officer, Chief Financial Officer,
Vice President-Operations, and Vice President-Marketing have joined the Company
within the past 16 months. Furthermore, in 1993 the Company commenced operations
in North America which included the establishment of a U.S. management team. As
a result, the Company has a limited operating history under its current U.S.
management. In addition, the number of employees has grown from 50 at December
31, 1995 to 75 as of September 30, 1997. If the Company is successful in
achieving its growth plans, such growth is likely to place a significant burden
on the Company's operating and financial systems, resulting in increased
responsibility for senior management and other personnel within the Company.
There can be no assurance that the Company's existing management or any new
members of management will be able to augment or improve existing systems and
controls or implement new systems and controls in response to anticipated future
growth. The Company's failure to do so could have a material adverse effect on
the Company's business and operating results.
INTEGRATION OF GLOBAL LOCATIONS
The Company's U.S. headquarters are located in Los Gatos, California, its
European headquarters are located in Pfaffenhofen, Germany, and its research and
development facilities are located in Erfurt, Germany and La Ciotat, France. In
addition, a significant portion of the Company's contract manufacturing occurs
in Singapore. Operating in diverse geographic locations imposes a number of
risks and burdens on the Company, including the need to manage employees and
contractors from diverse cultural backgrounds and who speak different languages,
and difficulties associated with operating in a number of time zones. Although
the Company seeks to mitigate the difficulties associated with operating in
diverse geographic locations through the extensive use of electronic mail and
teleconferencing, there can be no assurance that it will not encounter
unforeseen difficulties or logistical barriers in operating in diverse
locations. Furthermore, operations in widespread geographic locations require
the Company to implement and operate complex information systems that are
capable of providing timely information which can readily be consolidated.
Although the Company believes that its information systems are adequate, the
Company may in the future have to implement new information systems.
Implementation of such new information systems may be costly and may require
training of personnel. Any failure or delay in implementing these systems,
procedures and controls on a timely basis, if necessary, or in expanding these
areas in an efficient manner at a pace consistent with the Company's business
could have a material adverse effect on the Company's business and operating
results.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent, copyright
and trademark laws, trade
<PAGE> 16
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. The Company generally enters into confidentiality and
non-disclosure agreements with its employees and with key vendors and suppliers.
The Company's SwapBox trademark is registered in the United States, and the
SwapSmart trademark is the subject of an allowed, pending application. The
Company will continue to evaluate the registration of additional trademarks as
appropriate. The Company currently has one U.S. patent issued, six U.S., one
French and one Japanese patent applications pending, and exclusive licenses
under four other U.S. patents associated with its products. Furthermore, the
Company intends to obtain an exclusive license from one of its employees to five
other patents relating to its products. There can be no assurance that any new
patents will be issued, that the Company will develop proprietary products or
technologies that are patentable, that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's business.
There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing upon third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
patents, trademarks or other proprietary rights. In April 1997, Gemplus served
the Company with a complaint alleging that the Company's SwapSmart product
infringes certain claims of a French patent held by Gemplus. Although such
dispute was settled on terms acceptable to the Company, there can be no
assurance that future disputes with third parties will not arise nor that any
such disputes can be resolved on terms acceptable to the Company. The Company
expects that companies in the computer and digital information security market
will increasingly be subject to infringement claims as the number of products
and competitors in the Company's target markets grows. Any such claims or
litigation may be time-consuming and costly, cause product shipment delays,
require the Company to redesign its products or require the Company to enter
into royalty or licensing agreements, any of which could have a material adverse
effect on the Company's business and operating results. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information and
software that the Company regards as proprietary. In addition, the laws of some
foreign countries do not protect proprietary and intellectual property rights to
as great an extent as do the laws of the United States. There can be no
assurance that the Company's means of protecting its proprietary and
intellectual property rights will be adequate or that the Company's competitors
will not independently develop similar technology, duplicate the Company's
products or design around patents issued to the Company or other intellectual
property rights of the Company.
DEPENDENCE ON CONTRACT AND OFFSHORE MANUFACTURING; LIMITED NUMBER OF
SUPPLIERS OF KEY COMPONENTS
The Company has implemented a global sourcing strategy that it believes
will enable it to
<PAGE> 17
achieve greater economies of scale, improve gross margins and maintain uniform
quality standards for its products. The Company currently sources its products
through three contract manufacturers in Europe and Asia. In the event any of the
Company's contract manufacturers are unable or unwilling to continue to
manufacture the Company's products, the Company may have to rely on other
current manufacturing sources or identify and qualify new contract
manufacturers. In this regard, one of the Company's contract manufacturers has
recently been involved in bankruptcy proceedings and may be unable to continue
manufacturing the Company's products. In the event that such manufacturer (or
any other key supplier) were unable to meet the Company's requirements, there
can be no assurance that the Company would be able to identify or qualify new
contract manufacturers in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
Any significant delay in the Company's ability to obtain adequate supplies of
its products from its current or alternative sources would materially and
adversely affect the Company's business and operating results.
In an effort to reduce manufacturing costs, the Company has shifted volume
production of many components of its products to Singapore. The Company is
currently considering shifting the production of other components of its
products to other suppliers in Europe or Asia. Difficulties encountered in
transferring production may have a disruptive effect on the Company's
manufacturing process and increase overall production costs. Due to the
substantial concentration of the Company's manufacturing operations in
Singapore, a disruption of operations at its contractor's facilities there could
have a material adverse effect on the Company's business and operating results.
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, difficulties in staffing, currency fluctuations,
potentially adverse tax consequences and unexpected changes in regulatory
requirements, tariffs and other trade barriers, and political and economic
instability.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. For example, the
Company purchases many of the components for use in its SwapSmart and SwapBox
products from Intellicard Systems, a Singapore-based supplier, and mechanical
components for use in its smart card reader product exclusively from Stocko, a
German-based supplier. The Company's reliance on sole source suppliers involves
several risks, including a potential inability to obtain an adequate supply of
required components, price increases, late deliveries and poor component
quality. Although to date the Company has been able to purchase its requirements
of such components, there can be no assurance that the Company will be able to
obtain its full requirements of such components in the future or that prices of
such components will not increase. In addition, there can be no assurance that
problems with respect to yield and quality of such components and timeliness of
deliveries will not occur. Disruption or termination of the supply of these
components could delay shipments of the Company's products and could have a
material adverse effect on the Company's business and operating results. Such
delays could also damage relationships with current and prospective customers.
<PAGE> 18
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapid
technological change, changing customer needs, frequent new product introduction
and evolving industry standards and short product lifecycles. The introduction
by the Company or its competitors of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
obsolete and unmarketable. Therefore, the Company's future success will depend
upon its ability to successfully develop and to introduce on a timely and
continuous basis new and enhanced products that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. The timing and success of product
development is unpredictable due to the inherent uncertainty in anticipating
technological developments, the need for coordinated efforts of numerous
technical personnel and the difficulties in identifying and eliminating design
flaws prior to product release. Any significant delay in releasing new products
could have a material adverse effect on the ultimate success of a product and
other related products and could impede continued sales of predecessor products,
any of which could have a material adverse effect on the Company's business and
operating results. There can be no assurance that the Company will be able to
introduce new products on a timely basis, that new products introduced by the
Company will achieve any significant degree of market acceptance or that any
such acceptance will be sustained for any significant period. Failure of new
products to achieve or sustain market acceptance could have a material adverse
effect on the Company's business and operating results.
RISKS OF INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
The Company was originally a German corporation and continues to conduct a
substantial portion of its business in Europe. Approximately 83%, 49%, 53% and
66% of the Company's revenues in 1994, 1995, 1996 and the nine months ended
September 30, 1997, respectively, were derived from customers located outside
the United States. Because a significant number of the Company's principal
customers are located in other countries, the Company anticipates that
international sales will continue to account for a significant portion of its
revenues. As a result, a significant portion of the Company's sales and
operations may continue to be subject to certain risks, including tariffs and
other trade barriers, difficulties in staffing and managing disparate branch
operations, currency exchange risks and exchange controls and potential adverse
tax consequences. These factors may have a material adverse effect on the
Company's business and operating results.
As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the German
mark, in relation to the U.S. dollar. The Company does not currently engage in
hedging activities with respect to its foreign currency exposure. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, there can be no assurance
that exchange rate fluctuations will not have a material adverse effect on the
Company's business and operating results. In the future, the Company could be
required to denominate its product sales in other currencies, which would
<PAGE> 19
make the management of currency fluctuations more difficult and expose the
Company to greater risks in this regard.
PRODUCT LIABILITY RISKS
Customers rely on the Company's token-based security products to prevent
unauthorized access to their digital content. A malfunction of or design defect
in the Company's products could result in tort or warranty claims. Although the
Company attempts to reduce the risk of exposure from such claims through
warranty disclaimers and liability limitation clauses in its sales agreements
and by maintaining product liability insurance, there can be no assurance that
such measures will be effective in limiting the Company's liability for any such
damages. Any liability for damages resulting from security breaches could be
substantial and could have a material adverse effect on the Company's business
and operating results. In addition, a well-publicized actual or perceived
security breach involving token-based security systems could adversely affect
the market's perception of token-based security products in general, or the
Company's products in particular, regardless of whether such breach is
attributable to the Company's products. This could result in a decline in demand
for the Company's products, which would have a material adverse effect on the
Company's business and operating results.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL
The Company's future performance depends in significant part upon the
continued service of Robert Schneider, the Company's Chairman of the Board,
Steven Humphreys, the Company's President and Chief Executive Officer, and Bernd
Meier, the Company's Chief Operating Officer, as well as its other key technical
and senior management personnel. The Company provides compensation incentives
such as bonuses, benefits and option grants (which are typically subject to
vesting over four years) to attract and retain qualified employees. In addition,
the Company's German subsidiary has entered into substantially similar
employment agreements with each of Messrs. Schneider and Meier pursuant to which
each serves as a Managing Director of the subsidiary. Each of the respective
agreements has no set termination date, may be terminated by the subsidiary or
the officer with six months notice, and provides that the officer is bound by a
non-compete provision during the one-year period following his termination.
Non-compete agreements are, however, generally difficult to enforce and
therefore these provisions may not provide significant protection to the
Company. The Company also has an employment agreement with Jean-Yves Le Roux,
its Vice President, Engineering, that is terminable by either party at will. The
Company does not have employment agreements with any of its other key employees
and does not maintain key man life insurance on any of its employees. The loss
of the services of one or more of the Company's officers or other key employees
could have a material adverse effect on the Company's business and operating
results. The Company believes that its future success will depend in large part
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key technical and management
employees or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future.
<PAGE> 20
POTENTIAL VOLATILITY OF STOCK PRICE
The stock market has recently experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies. In
addition, the market price of the Company's Common Stock has been highly
volatile and is likely to continue to be so. Factors such as variations in the
Company's financial results, comments by security analysts, the Company's
ability to increase its manufacturing capability as required by customer demand,
any loss of key management, announcements of technological innovations or new
products by the Company or its competition, patents or other proprietary rights
or product or patent litigation, may have a significant effect on the market
price of the Company's Common Stock.
<PAGE> 21
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Revolving Credit Loan and Security Agreement between Comerica
Bank and SCM Microsystems, Inc.
11.1 Statement of computation of net income (loss) per share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1997.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCM MICROSYSTEMS, INC.
Date: November 12, 1997
/s/ John G. Niedermaier .
--------------------------------------------
John G. Niedermaier
Vice President- Finance, Chief Financial
Officer (Principal Financial and Accounting
Officer)
<PAGE> 23
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 Revolving Credit Loan and Security Agreement between Comerica Bank and
SCM Microsystems, Inc.
11.1 Statement of computation of net income (loss) per share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
Revolving
Loan & Security Agreement
(Accounts & Inventory)
OBLIGOR # NOTE# AGREEMENT DATE
I SEPTEMBER 26, 1997
CREDIT LIMIT INTEREST RATE B+0 .00% OFFICER NO/INITIALS
$3,000,000.00 8.50% 48703 MARY BETH SUHR
THIS AGREEMENT is entered into on SEPTEMBER 26, 1997 , between COMERICA
BANK-CALIFORNIA ("Bank") as secured party, whose Headquarter Office is 333 West
Santa Clara Street San Jose CA and SCM MICROSYSTEMS, INC ("Borrower"), a
Delaware Corporation whose sole place of business (if it has only one), chief
executive office (if it has more than one place of business) or residence (if an
individual) is located at 131 Albright Way, Los Gatos CA The parties agree as
follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this
Revolving Credit Loan & Security Agreement (Accounts and Inventory), any
concurrent or subsequent rider to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and any extensions, supplements,
amendments or modifications to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes:
all costs or expenses required to be paid by Borrower under this Agreement
which are paid or advanced by Bank; taxes and insurance premiums of every
nature and kind of Borrower paid by Bank; filing, recording, publication
and search fees, appraiser fees, auditor fees and costs, and title
insurance premiums paid or incurred by Bank in connection with Bank's
transactions with Borrower; costs and expenses incurred by Bank in
collecting the Receivables (with or without suit) to correct any default
or enforce any provision of this Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, disposing
of, preparing for sale and/or advertising to sell the Collateral, whether
or not a sale is consummated; costs and expenses of suit incurred by Bank
in enforcing or defending this Agreement or any portion hereof, including,
but not limited to, expenses incurred by Bank in attempting to obtain
relief from any stay, restraining order, injunction or similar process
which prohibits Bank from exercising any of its rights or remedies; and
attorneys' fees and expenses incurred by Bank in advising, structuring,
drafting, reviewing, amending, terminating, enforcing, defending or
concerning this Agreement, or any portion hereof or any agreement related
hereto, whether or not suit is brought. Bank Expenses shall include Bank's
in-house legal charges at reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate
of interest so announced by Bank at its headquarters office in San Jose,
California as its "Base Rate" from time to time and which serves as the
basis upon which effective rates of interest are calculated for those
loans making reference thereto.
1.4 "Borrower's Books" as used in this Agreement means and
includes all of the Borrower's books and records Including but not limited
to: minute books; ledgers, records indicating, summarizing or evidencing
Borrower's assets, liabilities, Receivables, business operations or
financial condition, and all information relating thereto, computer
programs; computer disk or tape files; computer printouts; computer runs;
and other computer prepared information and equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of:
(1) EIGHTY * percent (80%) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable
thereto ("Accounts Receivable Borrowing Base"); and (2) the amount, if
any, of the advances against Inventory agreed to be made pursuant to any
Inventory Rider ("Inventory Borrowing Base"), or other rider, amendment or
modification to this Agreement that may now or hereafter be entered into
by Bank and Borrower. *APPLIES ONLY PRIOR TO THE COMPLETION OF AN INITIAL
PUBLIC OFFERING WITH MINIMUM NET PROCEEDS TO BORROWER IN EXCESS OF
$20,000,000.00; POST INITIAL PUBLIC OFFERING, ADVANCES WILL BE ALLOWED
WITHOUT REGARD TO FORMULA.
1.6 "Cash Flow" as used in this Agreement means, for any
applicable period of determination, the Net Income (after deduction for
income taxes and other taxes of such person determined by reference to
income or profits of such person) for such period, plus, to the extent
deducted in computation of such Net Income, the amount of depreciation and
amortization expense and the amount of deferred tax liability during such
period, all as determined in accordance with GAAP. The
<PAGE> 2
Revolving
Loan & Security Agreement
(Accounts & Inventory)
applicable period of determination will be N/A ,beginning with the period
from ___ to ___.
1.7 "Collateral" as used in this Agreement means and includes each
and all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other
assets of Borrower in which Bank receives a security interest or which
hereafter come into the possession, custody or control of Bank; and the
proceeds of any of the foregoing, including, but not limited to, proceeds
of insurance covering the collateral and any and all Receivables,
Intangibles, negotiable collateral, Inventory, equipment, money, deposit
accounts or other tangible and intangible property of borrower resulting
from the sale or other disposition of the collateral, and the proceeds
thereof. Notwithstanding anything to the contrary contained herein,
collateral shall not include any waste or other materials which have been
or may be designated as toxic or hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations,
except those obligations arising pursuant to any other separate contract,
instrument, note, or other separate agreement which, by its terms,
provides for a specified interest rate and term.
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer
receivables, United States government securities, claims against the
United States government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of
any applicable date of determination, (I) all liabilities of a person that
should be classified as current in accordance with GAAP, including without
limitation any portion of the principal of the Indebtedness classified as
current, plus (ii) to the extent not otherwise included, all liabilities
of the Borrower to any of its affiliates whether or not classified as
current in accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a
given day, adding any new Credit advanced or incurred on such date, and
subtracting any payments or collections which are deemed to be paid and
are applied by Bank in reduction of the Credit on that date under the
provisions of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and
includes those accounts of Borrower which are due and payable within
THIRTY (30) days, or less, from the date of invoice, have been validly
assigned to Bank and strictly comply with all of Borrower's warranties and
representations to Bank; but Eligible Accounts shall not include the
following: (a) accounts with respect to which the account debtor is an
officer, employee, partner, joint venturer or agent of Borrower; (b)
accounts with respect to which goods are placed on consignment, guaranteed
sale or other terms by reason of which the payment by the account debtor
may be conditional; (c) accounts with respect to which the account debtor
is not a resident of the United States *; (d) accounts with respect to
which the account debtor is the United States or any department, agency or
instrumentality of the United States; (e) accounts with respect to which
the account debtor is any State of the United States or any city, county,
town, municipality or division thereof; (f) accounts with respect to which
the account debtor is a subsidiary of, related to, affiliated or has
common shareholders, officers or directors with Borrower; (g) accounts
with respect to which Borrower is or may become liable to the account
debtor for goods sold or services rendered by the account debtor to
Borrower; (h) accounts not paid by an account debtor within ninety (90)
days from the date of the invoice; (i) accounts with respect to which
account debtors dispute liability or make any claim, or have any defense,
crossclaim, counterclaim, or offset; (1) accounts with respect to which
any Insolvency Proceeding is filed by or against the account debtor, or if
an account debtor becomes i fails or goes out of business; and (k)
accounts owed by any single account debtor which exceed twenty-five
percent (25%); of all of the Eligible Accounts; and (l) accounts with a
particular account debtor on which over twenty-five percent (25 %) of the
aggregate amount owing is greater than ninety (90) days from the date of
the invoice
* EXCEPT LETTER OF CREDIT, FOREIGN CREDIT INSURANCE OR SPECIFICALLY
APPROVED BY BANK.
** THIRTY FIVE PERCENT (35%) FOR DELL, GATEWAY, IBM AND PACKARD BELL.
1.13 "Event of Default" as used in this Agreement means those
events described In Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes,
for any applicable period of determination, the sum, without duplication,
of (a) all interest paid or payable during such period by a person on debt
of such person, plus (b) all payments of principal or other sums paid or
payable during such period by such person with respect to debt of such
person having a final maturity more than one year from the date of
creation of such debt, plus (c) all debt discount and expense amortized or
required to be amortized during such period by such person, plus (d) the
maximum amount of all rents and other payments paid or required to be paid
by such person during such period under any lease or other contract or
<PAGE> 3
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Loan & Security Agreement
(Accounts & Inventory)
arrangement providing for use of real or personal property in respect of
which such person is obligated as a lessee, use or obligor, plus (e) all
dividends and other distributions paid or payable by such person or
otherwise accumulating during such period on any capital stock of such
person, plus (f) all loans or other advances made by such person during
such period to any Affiliate of such person. The applicable period of
determination will be N/A beginning with the period from ________________
to___________________________.
1.15 "GAAP" as used in this Agreement means as of any applicable
period, generally accepted accounting principles in effect during such
period.
1.16 "Insolvency Proceeding" as used in this Agreement means and
includes any proceeding or case commenced by or against the Borrower, or
any guarantor of Borrower's Obligations, or any of borrower's account
debtors, under any provisions of the Bankruptcy Code, as amended, or any
other bankruptcy or insolvency law, including but not limited to
assignments for the benefit of creditors, formal or informal moratoriums,
composition or extensions with some or all creditors, any proceeding
seeking a reorganization, arrangement or any other relief under the
Bankruptcy code, as amended, or any other bankruptcy or insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all
of Borrower's present and future general Intangibles and other personal
property (including, without limitation, any and all rights In any legal
proceedings, goodwill, patents, trade names, copyrights, trademarks,
blueprints, drawings, purchase orders, computer programs, computer disks,
computer tapes, literature, reports, catalogs and deposit accounts) other
than goods and Receivables, as well as Borrower's Books relating to any of
the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all
present and future Inventory in which Borrower has any interest,
including, but not limited to, goods held by Borrower for sale or lease or
to be furnished under a contract of service and all of Borrower's present
and future raw materials, work in process, finished goods, advertising
materials, and packing and shipping materials, wherever located and any
documents of title representing any of the above, and any equipment,
fixtures or other property used in the storing, moving, preserving,
identifying, accounting for and shipping or preparing for the shipping of
inventory, and any and all other items hereafter acquired by Borrower by
way of substitution, replacement, return, repossession or otherwise, and
all additions and accessions thereto, and the resulting product or mass,
and any documents of title respecting any of the above.
1.19 "Net Income" as used in this Agreement means the net income
(or loss) of a person for any period determined in accordance with GAAP
but excluding in any event:
(a) any gains or losses on the sale or other disposition, not
in the ordinary course of business, of investments or fixed or
capital assets, and any taxes on the excluded gains and any
tax deductions or credits on account on any excluded losses;
and
(b) in the case of the Borrower, net earnings of any Person in
which Borrower has an ownership interest, unless such net
earnings shall have actually been received by Borrower in the
form of cash distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means
and includes any trustee, receiver, controller, custodian, assignee for
the benefit of creditors or any other person or entity having powers or
duties like or similar to the powers and duties of trustee, receiver,
controller, custodian or assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any
and all loans, advances, overdrafts, debts, liabilities (including,
without limitation, any and all amounts charged to Borrower's account
pursuant to any agreement authorizing Bank to charge Borrower's account),
obligations, lease payments, guaranties, covenants and duties owing by
Borrower to Bank of any kind and description whether advanced pursuant to
or evidenced by this Agreement; by any note or other instrument; or by any
other agreement between Bank and Borrower and whether or not for the
payment of money, whether direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, and including,
without limitation, any debt, liability or obligation owing from Borrower
to others which Bank may have obtained by assignment, participation,
purchase or otherwise, and further including, without limitation, all
Interest not paid when due and all Bank Expenses which Borrower is
required to pay or reimburse by this Agreement, by law, or otherwise.
1.22 "Person" or "person" as used in this Agreement means and
includes any individual, corporation, partnership, joint venture,
association, trust, unincorporated association, joint stock company,
government, municipality, political subdivision or agency, or other
entity.
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Loan & Security Agreement
(Accounts & Inventory)
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing
to Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all
contracts or agreements (whether or not yet earned or due), all
merchandise returned to or reclaimed by Borrower and the Borrower's books
(except minute books) relating to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means
indebtedness of the Borrower to third parties which has been subordinated
to the Obligations pursuant to a subordination agreement in form and
content satisfactory to the Bank.
1.25 "Subordination Agreement" as used in this Agreement means a
subordination agreement in form satisfactory to Bank making all present
and future indebtedness of the Borrower to N/A subordinate to the
Obligations.
1.26 "Tangible Effective Net Worth" as used in this Agreement means
net worth as determined in accordance with GAAP consistently applied,
increased by Subordinated Debt, if any, and decreased by the following:
patents, licenses, goodwill, subscription lists, organization expenses,
trade receivables converted to notes, money due from affiliates (including
officers, directors, subsidiaries and commonly held companies, investment
in subsidiary and inter-company equity).
1.27 "Tangible Net Worth" as used in this Agreement means, as of
any applicable date of determination, the excess of
a. the net book value of all assets of a person (other than
patents, patent rights, trademarks, trade names, franchises,
copyrights, licenses, goodwill, and similar intangible assets)
after all appropriate deductions in accordance with GAAP
(including, without limitation, reserves for doubtful
receivables, obsolescence, depreciation and amortization),
over
b. all debt of such person.
1.28 "Total Liabilities" as used in this Agreement means the total
of all items of indebtedness, obligation or liability which, in accordance
with GAAP consistently applied, would be included in determining the total
liabilities of the Borrower as of the date Total Liabilities is to be
determined, including without limitation (a) all obligations secured by
any mortgage, pledge, security interest or other lien on property owned or
acquired, whether or not the obligations secured thereby shall have been
assumed; (b) all obligations which are capitalized lease obligations; and
(c) all guaranties, endorsements or other contingent or surety obligations
with respect to the indebtedness of others, whether or not reflected on
the balance sheets of the Borrower, including any obligation to furnish
funds, directly or indirectly through the purchase of goods, supplies,
services, or by way of stock purchase, capital contribution, advance or
loan or any obligation to enter into a contract for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
1.30 Any and all terms used in this Agreement shall be construed
and defined in accordance with the meaning and definition of such terms
under and pursuant to the California Uniform Commercial Code (hereinafter
referred to as the "Code") as amended.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with interest, as provided for
below.
2.1 Upon the request of Borrower, made at any time and from time
to time during the term hereof, and so long as no Event of Default has
occurred, Bank shall lend to Borrower an amount equal to the Borrowing
Base; provided, however, that in no event shall Bank be obligated to make
advances to Borrower under this Section 2.1 whenever the Daily Balance
exceeds, at any time, either the Borrowing Base or the sum of THREE
MILLION AND NO/100 ($3,000,000.00), such amount being referred to herein
as an Overadvance".
2.2 Except as herein below provided, the Credit shall bear
interest, on the Daily Balance owing, at a rate of NO/1000 (0.000)
percentage points per annum above the Base Rate (the "Rate"). The Credit
shall bear interest, from and after the occurrence of an Event of Default
and without constituting a waiver of any such Event of Default, on the
Daily Balance
<PAGE> 5
Revolving
Loan & Security Agreement
(Accounts & Inventory)
owing, at a rate three (3) percentage points per annum above the Rate. All
interest chargeable under this Agreement that is based upon a per annum
calculation shall be computed on the basis of a three hundred sixty (360)
day year for actual days elapsed.
The Base Rate as of the date of this Agreement is EIGHT AND 500/1000
(8.500%) per annum. In the event that the Base Rate announced is, from
time to time hereafter changed, adjustment in the Rate shall be made and
based on the Base Rate in effect on the date Of such change. The Rate, as
adjusted, shall apply to the Credit until the Base Rate is adjusted again.
The minimum interest payable by the Borrower under this Agreement shall in
no event be less than N/A per month. All interest payable by Borrower
under the Credit shall be due and payable on the first day of each
calendar month during the term of this Agreement and Bank may, at its
option, elect to treat such interest and any and all Bank Expenses as
advances under the Credit, which amounts shall thereupon constitute
Obligations and shall thereafter accrue interest at the rate applicable to
the Credit under the terms of the Agreement.
2.3 Without affecting Borrower's obligation to repay immediately
any Overadvance in accordance with Section 2.1 hereof, all Overadvances
shall bear additional interest on the amount thereof at a rate equal
to N/A (N/A%) percentage points per month in excess of the interest rate
set forth in Section 2.2, from the date incurred and for each month
thereafter, until repaid in full.
3. TERM.
3.1 This Agreement shall remain in full force and effect until MAY
1, 1999, or until terminated by notice by Borrower. Notice of such
termination by Borrower shall be effectuated by mailing of a registered or
certified letter not less than thirty (30) days prior to the effective
date of such termination, addressed to the Bank at the address set forth
herein and the termination shall be effective as of the date so fixed in
such notice. Notwithstanding the foregoing, should Borrower be in default
of one or more of the provisions of this Agreement, Bank may terminate
this Agreement at any time without notice. Notwithstanding the foregoing,
should either Bank or Borrower become insolvent or unable to meet its
debts as they mature, or fail, suspend, or go out of business, the other
party shall have the right to terminate this Agreement at any time without
notice. On the date of termination all Obligations shall become
immediately due and payable without notice or demand; no notice of
termination by Borrower shall be effective until Borrower shall have paid
all Obligations to Bank in full. Notwithstanding termination, until all
Obligations have been fully satisfied, Bank shall retain its security
interest in all existing Collateral and Collateral arising thereafter, and
Borrower shall continue to perform all of its Obligations.
3.2 After termination and when Bank has received payment in full
of Borrower's Obligations to Bank, Bank shall reassign to Borrower all
Collateral held by Bank, and shall execute a termination of all security
agreements and security interests given by Borrower to Bank, upon the
execution and delivery of mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest
in all presently existing and hereafter arising Collateral in order to
secure prompt repayment of any and all Obligations owed by Borrower to
Bank and in order to secure prompt performance by Borrower of each and all
of its covenants and Obligations under this Agreement and otherwise
created. Bank's security interest in the Collateral shall attach to all
Collateral without further act on the part of Bank or Borrower. In the
event that any Collateral, including proceeds, is evidenced by or consists
of a letter of credit, advice of credit, instrument, money, negotiable
documents, chattel paper or similar property (collectively, "Negotiable
Collateral"), Borrower shall, immediately upon receipt thereof, endorse
and assign such Negotiable Collateral over to Bank and deliver actual
physical possession of the Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon
request from Bank, Borrower shall provide Bank with schedules describing
all Receivables created or acquired by Borrower (including without
limitation agings listing the names and addresses of, and amounts owing by
date by account debtors), and shall execute and deliver written
assignments of all Receivables to Bank all in a form acceptable to Bank,
provided, however, Borrower's failure to execute and deliver such
schedules and/or assignments shall not affect or limit Bank's security
interest and other rights in and to the Receivables. Together with each
schedule, Borrower shall furnish Bank with copies of Borrower's customers'
invoices or the equivalent, and original shipping or delivery receipts for
all merchandise sold, and Borrower warrants the genuineness thereof. Bank
or Bank's designee may notify customers or account debtors of collection
costs and expenses to Borrower's account but, unless and until Bank does
so or gives Borrower other written instructions, Borrower shall collect
all Receivables for Bank, receive in trust all payments thereon a: Bank's
tru8tee, and, if so requested to do so from Bank, Borrower shall
Immediately deliver said payments to Bank in
<PAGE> 6
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Loan & Security Agreement
(Accounts & Inventory)
their original form as received from the account debtor and all letters of
credit, advices of credit, instruments, documents, chattel paper or any
similar property evidencing or constituting Collateral. Notwithstanding
anything to the contrary contained herein, if sales of Inventory are made
for cash, Borrower shall immediately deliver to Bank, in identical form,
all such cash, checks, or other forms of payment which Borrower receives.
The receipt of any check or other item of payment by Bank shall not be
considered a payment on account until such check or other item of payment
is honored when presented for payment, in which event, said check or other
item of payment shall be deemed to have been paid to Bank TWO (2)
calendar days after the date Bank actually receives such check or other
item of payment.
4.3 Bank's security interest in Inventory shall attach to all
Inventory without further act on the part of Bank or Borrower. Upon Bank's
request Borrower will from time to time at Borrower's expense pledge,
assemble and deliver such Inventory to Bank or to a third party as Bank's
bailee; or hold the same in trust for Bank's account or store the same in
a warehouse in Bank's name; or deliver to Bank documents of title
representing said Inventory: or evidence of Bank's security interest in
some other manner acceptable to Bank. Until a default by Borrower under
this Agreement or any other Agreement between Borrower and Bank, Borrower
may, subject to the provisions hereof and consistent herewith, sell the
Inventory, but only in the ordinary course of Borrower's business. A sale
of Inventory in Borrower's ordinary' course of business does not include
an exchange or a transfer in partial or total satisfaction of a debt owing
by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter
at the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of
title, affidavits, reports, notices, schedules of accounts, letters of
authority and all other documents that Bank may request, in form
satisfactory to Bank, to perfect and maintain perfected Bank's security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement. Borrower hereby
irrevocably makes, constitutes and appoints Bank (and any of Bank's
officers, employees or agents designated by Bank) as Borrower's true and
lawful attorney-in-fact with power to sign the name of Borrower on any
financing statements, continuation financing statements, security
agreement, mortgage, assignment, certificate of title, affidavit, letter
of authority, notice of other similar documents which must be executed
and/or filed in order to perfect or continue perfected Bank's security
interest in the Collateral.
Borrower shall make appropriate entries in Borrower's Books
disclosing Bank's security interest in the Receivables. Bank (through any
of its officers, employees or agents) shall have the right at any time or
times hereafter during Borrower's usual business hours, or during the
usual business hours of any third party having control over the records of
Borrower, to inspect and verify Borrower's Books in order to verify the
amount or condition of, or any other matter, relating to, said Collateral
and Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may
designate as Borrower's attorney-in-fact, with power to endorse Borrower's
name on any checks, notes, acceptances, money order, drafts or other forms
of payment or security that may come into Bank's possession; to sign
Borrower's name on any invoice or bill of lading relating to any
Receivables, on drafts against account debtors, on schedules and
assignments of Receivables, on verifications of Receivables and on notices
to account debtors; to establish a lock box arrangement and/or to notify
the post office authorities to change the address for delivery of
Borrower's mail addressed to Borrower to an address designated by Bank, to
receive and open all mail addressed to Borrower, and to retain all mail
relating to the Collateral and forward all other mail to Borrower; to
send, whether in writing or by telephone, requests for verification of
Receivables; and to do all things necessary to carry out this Agreement.
Borrower ratifies and approves all acts of the attorney-in-fact. Neither
Bank nor its attorney-in-fact will be liable for any acts or omissions or
for any error of judgment or mistake of fact or law. This power being
coupled with an interest, is irrevocable so long as any Receivables in
which Bank has a security interest remain unpaid and until the Obligations
have been fully satisfied.
4.6 In order to protect or perfect any security interest which
Bank is granted hereunder, Bank may, in its sole discretion, discharge any
lien or encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or, obtain any records, and all costs for the same shall be added
to the Obligations and shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to
this Agreement or relating to Borrower to Bank's parent, affiliates,
subsidiaries and service providers.
<PAGE> 7
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Loan & Security Agreement
(Accounts & Inventory)
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the
extension of the financial accommodations hereunder, Borrower shall
execute, or cause to be executed, and deliver to Bank, in form and
substance satisfactory to Bank and its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1) in form satisfactory to
Bank for filing and recording with the appropriate
governmental authorities;
c. If Borrower is a corporation, then certified extracts from
the minutes of the meeting of its board of directors,
authorizing the borrowings and the granting of the security
interest provided for herein and authorizing specific officers
to execute and deliver the agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good
standing showing that Borrower is in good standing under the
laws of the state of its incorporation and certificates
indicating that Borrower is qualified to transact business and
is in good standing in any other state in which it conducts
business;
e. If Borrower is a partnership, then a copy of Borrower's
partnership agreement certified by each general partner of
Borrower;
f. UCC searches, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or
other similar documents which Bank may require and in such
form as Bank may require, in order to reflect, perfect or
protect Bank's first priority security interest in the
Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;
g. Evidence that Borrower has obtained insurance and
acceptable endorsements;
h. Waivers executed by landlords and mortgagees of any real
property on which any Collateral is located; and
i. Warranties and representations of officers.
6. WARRANTIES REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank
Borrower's Borrowing Base at all times pertinent hereto shall not be less
than the advances made hereunder. Bank shall have the right to recompute
Borrower's Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account
is not paid in full by an account debtor within NINETY (90) days from the
date of invoice, or an account debtor disputes liability or makes any
claim with respect thereto, or a petition in bankruptcy or other
application for relief under the Bankruptcy Code or any other insolvency
law is filed by or against an account debtor, or an account debtor makes
an assignment for the benefit of creditors, becomes insolvent, fails or
goes out of business, then Bank may deem ineligible any end all accounts
owing by that account debtor, and reduce Borrower's Borrowing Base by the
amount thereof. Bank shall retain its security interest in all Receivables
and accounts, whether eligible or ineligible, until all Obligations have
been fully paid and satisfied. Returns and allowances, if any, as between
Borrower and its customers, will be on the same basis and in accordance
with the usual customary practices of the Borrower, as they exist at this
time. Any merchandise which is returned by an account debtor or otherwise
recovered shall be set aside, marked with Bank's name, and Bank shall
retain a security interest therein. Borrower shall promptly notify Bank of
all disputes and claims and settle or adjust them on terms approved by
Bank. After default by Borrower hereunder, no discount, credit or
allowance shall be granted to any account debtor by Borrower and no return
of merchandise shall be accepted by Borrower without Bank's consent. Bank
may, after default by Borrower, settle or adjust disputes and claims
directly with account debtors for amounts and upon terms which Bank
considers advisable, and in such cases Bank will credit Borrower's account
with only the net amounts received by Bank in payment of the accounts,
after deducting all Bank Expenses in connection therewith.
<PAGE> 8
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Loan & Security Agreement
(Accounts & Inventory)
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral.
Bank has and shall continue to have a first priority perfected
security interest in and to the Collateral. The Collateral
shall at all times remain free and clear of all liens,
encumbrances and security interests (except those in favor of
Bank).
b. All accounts are and will, at all times pertinent hereto,
be bona fide existing obligations created by the sale and
delivery of merchandise or the rendition of services to
account debtors in the ordinary course of business, free of
liens, claims, encumbrances and security interests (except as
held by Bank and except as may be consented to, in writing, by
Bank) and are unconditionally owed to Borrower without
defenses, disputes, offsets, counterclaims, rights of return
or cancellation, and Borrower shall have received no notice of
actual or imminent bankruptcy or insolvency of any account
debtor at the time an account due from such account debtor is
assigned to Bank.
c. At the time each account is assigned to Bank, all property
giving rise to such account shall have been delivered to the
account debtor or to the agent for the account debtor for
Immediate shipment to, and unconditional acceptance by, the
account debtor. Borrower shall deliver to Bank, as Bank may
from time to time require, delivery receipts, customer's
purchase orders, shipping instruction, bills of lading and any
other evidence of shipping arrangements. Absent such a request
by Bank, copies of all such documentation shall be held by
Borrower as custodian for Bank.
6.4 At the time each eligible account is assigned to Bank, all
such eligible accounts will be due and payable on terms set forth in
Section 1.12, or on such other terms approved in writing by Bank In
advance of the creation of such accounts and which are expressly set forth
on the face of all invoices, copies of which shall be held by Borrower as
custodian for Bank, and no such eligible account will then be past due.
6.5 Borrower shall keep the Inventory only at the following
locations: 131 Albright Way, Los Gatos, CA and the owner or mortgagees of
the respective locations are:
a. Borrower, Immediately upon demand by Bank therefor, shall
now and from time to time hereafter, at such intervals as are
requested by Bank, deliver to Bank, designations of Inventory
specifying Borrower's cost of Inventory, the wholesale market
value thereof and such other matters and information relating
to the Inventory as Bank may request;
b. Borrower's Inventory, valued at the lower of Borrower's
cost or the wholesale market value thereof, at all times
pertinent hereto shall not be less than N/A Dollars ($N/A) of
which no less than N/A Dollars($N/A) shall be in raw materials
and finished goods;
c. All of the Inventory is and shall remain free from all
purchase money or other security interests, liens or
encumbrances, except as held by Bank;
d. Borrower does now keep and hereafter at all times shall
keep correct and accurate records itemizing and describing the
kind, type, quality and quantity of the Inventory, its cost
therefor and selling price thereof, and the daily withdrawals
therefrom and additions thereto, all of which records shall be
available upon demand to any of Bank's officers, agents and
employees for inspection and copying;
e. All Inventory, now and hereafter at all times, shall be new
Inventory of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times
hereafter be located or stored with a bailee, warehouseman or
other third party without Bank's prior written consent, and,
in such event, Borrower will concurrently therewith cause any
such bailee, warehouseman or other third party to issue and
deliver to Bank, in a form acceptable to Bank, warehouse
receipts in Bank's name evidencing the storage of Inventory or
other evidence of Bank's prior rights in the Inventory. In any
event, Borrower shall instruct any third party to hold all
such Inventory for Bank's account subject to Bank's security
interests and its instructions; and
g. Bank shall have the right upon demand now and/or at all
times hereafter, during Borrower's usual business hours, to
inspect and examine the Inventory' and to check and test the
same as to quality, quantity, value and condition and Borrower
agrees to reimburse Bank for Bank's reasonable costs and
expenses in so doing.
<PAGE> 9
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Loan & Security Agreement
(Accounts & Inventory)
6.6 Borrower represents, warrants and covenants with Bank that
Borrower will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or
encumbrance upon any of the Collateral to any person,
association, firm, corporation, entity or governmental agency
or instrumentality;
b. Permit any levy, attachment or restraint to be made
affecting any of Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or
to take possession of any or all of Borrower's assets;
d. Other than sales of Inventory in the ordinary course of
Borrower's business, to sell, lease, or otherwise dispose of,
move, or transfer, whether by sale or otherwise, any of
Borrower's assets;
e. Change its name, business structure, corporate identity or
structure; add any new fictitious names, liquidate, merge or
consolidate with or into any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
h. Enter into any transaction not in the usual course of
Borrower s business;
i. Make any investment in securities of any person,
association, firm, entity, or corporation other than the
securities of the United States of America;
j. Make any change in Borrower's financial structure or in any
of its business objectives, purposes or operations which would
adversely effect the ability of Borrower to repay Borrower's
Obligations;
k. Incur any debts outside the ordinary course of Borrower's
business except renewals or extensions of existing debts and
interest thereon;
l. Make any advance or loan except in the ordinary course of
Borrower's business as currently conducted;
m. Make loans, advances or extensions of credit to any Person,
except for sales on open account and otherwise in the ordinary
course of business;
n. Guarantee or otherwise, directly or indirectly, in any way
be or become responsible for obligations of any other Person,
whether by agreement to purchase the indebtedness of any other
Person, agreement for the furnishing of funds to any other
Person through the furnishing of goods, supplies or services,
by way of stock purchase, capital contribution, advance or
loan, for the purpose of paying or discharging (or causing the
payment or discharge of) the indebtedness of any other Person,
or otherwise, except for the endorsement of negotiable
instruments by the Borrower in the ordinary course of business
for deposit or collection.
o. (a) Sell, lease, transfer or otherwise dispose of
properties and assets having an aggregate book value of more
than N/A Dollars ($N/A) (whether in one transaction or in a
series of transactions) except as to the sale of inventory in
the ordinary course of business; (b) change its name,
consolidate with or merge into any other corporation, permit
another corporation to merge into it, acquire all or
substantially all the properties or assets of any other
Person, enter Into any reorganization or recapitalization or
reclassify its capital stock, or (c) enter into any
sale-leaseback transaction;
p. Subordinate any indebtedness due to it from a person to
indebtedness of other creditors of such person;
q. Purchase or hold beneficially any stock or other securities
of, or make any investment or acquire any interest whatsoever
in, any other Person, except for the common stock of the
Subsidiaries owned by the Borrower on the date of this
Agreement and except for certificates of deposit with
maturities of one year or less of United States commercial
banks with capital, surplus and undivided profits in excess of
$100,000,000 and direct obligations of the United States
Government maturing within one year from the date of
acquisition thereof; or
<PAGE> 10
Revolving
Loan & Security Agreement
(Accounts & Inventory)
r. Allow any fact, condition or event to occur or exist with
respect to any employee pension or profit sharing plans
established or maintained by it which might constitute grounds
for termination of any such plan or for the court appointment
of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%)
In dollar volume of Its total sales of all goods during the 12 months
preceding the filing by Bank of a financing statement describing the
Collateral. At no time hereafter shall Borrower's sales for resale of
goods for personal, family or household purposes exceed seventy-five
percent (75%) in dollar volume of its total sales.
6.6 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants
and agrees that it will not, during the term of this Agreement, without
prior written notification to Bank, relocate said sole place of business
or chief executive office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants
and covenants as follows:
a. Borrower will not make any distribution or declare or pay
any dividend (in stock or in cash) to any shareholder or on
any of its capital stock, of any class, whether now or
hereafter outstanding, or purchase, acquire, repurchase,
redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a
corporation duly organized and existing in good standing under
the laws of the state of its incorporation and qualified and
licensed to do business in California or any other State in
which it conducts its business;
c. Borrower has the right and power and is duly authorized to
enter into this Agreement; and
d. The execution by Borrower of this Agreement shall not
constitute a breach of any provision contained in Borrower's
articles of incorporation or by-laws.
6.10 The execution of and performance by Borrower of all of the
terms and provisions contained In this Agreement shall not result in a
breach of or constitute an event of default under any agreement to which
Borrower is now or hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its
acquisition by purchase, lease or otherwise of any after acquired property
of the type included in the Collateral, with the exception of purchases of
Inventory' in the ordinary' course of business.
6.12 All assessments and taxes, whether real, personal or
otherwise, due or payable by, or imposed, levied or assessed against,
Borrower or any of its property have been paid, and shall hereafter be
paid in full, before delinquency. Borrower shall make due and timely
payment or deposit of all federal, state end local taxes, assessments or
contributions required of it by law, and will execute and deliver to Bank,
on demand, appropriate certificates attesting to the payment or deposit
thereof. Borrower will make timely payment or deposit of all F.I.C.A.
payments and withholding taxes required of it by applicable laws, and will
upon request furnish Bank with proof satisfactory to it that Borrower has
made such payments or deposit. If Borrower fails to pay any such
assessment, tax, contribution, or make such deposit, or furnish the
required proof, Bank may, in its sole and absolute discretion and without
notice to Borrower, (i) make payment of the same or any part thereof, or
(ii) set up such reserves in Borrower's account as Bank deems necessary to
satisfy the liability therefor, or both. Bank may conclusively rely on the
usual statements of the amount owing or other official statements issued
by the appropriate governmental agency. Each amount so paid or deposited
by Bank shall constitute a Bank Expense and an additional advance to
Borrower.
6.13 There are no actions or proceedings pending by or against
Borrower or any guarantor of Borrower before any court or administrative
agency and Borrower has no knowledge of any pending, threatened or
imminent litigation, governmental investigations or claims, complaints,
actions or prosecutions involving Borrower or any guarantor of Borrower,
except as heretofore specifically disclosed in writing to Bank. If any of
the foregoing arise during the term of the Agreement, Borrower shall
immediately notify Bank in writing.
<PAGE> 11
Revolving
Loan & Security Agreement
(Accounts & Inventory)
6.14 a. Borrower, at its expense, shall keep and maintain its
assets insured against loss or damage by fire, theft, explosion,
sprinklers and all other hazards and risks ordinarily insured against by
other owners who use such properties in similar businesses for the full
insurable value thereof. Borrower shall also keep and maintain business
interruption insurance and public liability and property damage insurance
relating to Borrower's ownership and use of the Collateral and its other
assets. All such policies of insurance shall be in such form, with such
companies, and in such amounts as may be satisfactory to Bank. Borrower
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All such policies of
insurance (except those of public liability and property damage) shall
contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties (Form 438-BFU), and all
proceeds payable thereunder shall be payable to Bank and, upon receipt by
Bank, shall be applied on account of the Obligations owing to Bank. To
secure the payment of the Obligations, Borrower grants Bank a security
interest in and to all such policies of insurance (except those of public
liability and property damage) and the proceeds thereof, and Borrower
shall direct all insurers under such policies of insurance to pay all
proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of
Bank's officers, employees or agents designated by Bank) as
Borrower's attorney for the purpose of making, selling and
adjusting claims under such policies of insurance, endorsing
the name of Borrower on any check, draft, instrument or other
item of payment for the proceeds of such policies of insurance
and for making all determinations and decisions with respect
to such policies of insurance. Borrower will not cancel any of
such policies without Bank's prior written consent. Each such
insurer shall agree by endorsement upon the policy or policies
of insurance issued by it to Borrower as required above, or by
independent instruments furnished to Bank, that it will give
Bank at least ten (10) days written notice before any such
policy or policies of insurance shall be altered or cancelled,
and that no act or default of Borrower, or any other person,
shall affect the right of Bank to recover under such policy or
policies of insurance required above or to pay any premium in
whole or in part relating thereto. Bank, without waiving or
releasing any Obligations or any Event of Default, may, but
shall have no obligation to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other
action with respect to such policies which Bank deems
advisable. All sums so disbursed by Bank, as well as
reasonable attorneys' fees, court costs, expenses and other
charges relating thereto, shall constitute Bank Expenses and
are payable on demand.
6.15 All financial statements and information relating to Borrower
which have been or may hereafter be delivered by Borrower to Bank are true
and correct and have been prepared in accordance with GAAP consistently
applied and there has been no material adverse change in the financial
condition of Borrower since the submission of such financial information
to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard
and modern system of accounting in accordance with GAAP consistently
applied with ledger and account cards and/or computer tapes and computer
disks, computer printouts and computer records pertaining to the
Collateral which contain information as may from time to time be requested
by Bank, not modify or change its method of accounting or enter into,
modify or terminate any agreement presently existing, or at any time
hereafter entered into with any third party accounting firm and/or service
bureau for the preparation and/or storage of Borrower's accounting records
without the written consent of Bank first obtained and without said
accounting firm and/or service bureau agreeing to provide information
regarding the Receivables and Inventory and Borrower's financial condition
to Bank; permit Bank and any of its employees, officers or agents, upon
demand, during Borrower's usual business hours, or the usual business hour
of third persons having control thereof, to have access to and examine all
of the Borrower's Books relating to the Collateral, Borrower's Obligations
to Bank, Borrower's financial condition and the results of Borrower's
operations and in connection therewith, permit Bank or any of its agents,
employees or officers to copy and make extracts therefrom. IF INITTAL
PUBLIC OFFERING IS NOT COMPLETED, FOR BORROWING GREATER THAN $500,000.00
AND FOR PERIOD LONGER THAN 60 DAYS, ANNUAL A/R AUDIT WITH SATISFACTORY
RESULTS IS REQUIRED.
b. Borrower shall deliver to Bank within thirty (30) days
after the end of each MONTH, a COMPANY PREPARED * balance
sheet and profit and loss statement covering Borrower's
operations and deliver to Bank within ninety (90) days after
the end of each of Borrower's fiscal years a CPA AUDITED
statement** of the financial condition of the Borrower for
each such fiscal year, including but not limited to, a balance
sheet and profit and loss statement and any other report
requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an
authorized employee of Borrower to the effect that all
reports, statements, computer disk or tape files, computer
printouts, computer runs, or other computer prepared
information of any kind or nature relating to the foregoing or
documents delivered or caused to be delivered to Bank under
this subparagraph are complete, correct and thoroughly present
the financial condition of borrower and that there exists on
the date of delivery to Bank no condition or event which
constitutes a breach or Event of Default under this Agreement.
*CONSOLIDATED AND CONSOLIDATING
**ACCOMPANIED WITH COVENANT COMPLIANCE CERTIFICATE
<PAGE> 12
Revolving
Loan & Security Agreement
(Accounts & Inventory)
UPON COMPLETION OF INITIAL PUBLIC OFFERING, QUARTERLY AND
ANNUAL CONSOLIDATED AND CONSOLIDATING STATEMENTS WILL BE
REQUIRED WITHIN FORTY FIVE (45) DAYS AFTER EACH QUARTER AND
FISCAL YEAR END AND MONTHLY FINANCIAL STATEMENT REPORTING AND
REPORTING REQUIRED UNDER SECTION 6.16C SHALL BE ELIMINATED.
c. In addition to the financial statements requested above,
the Borrower agrees to provide Bank with the following
schedules:
x Accounts Receivable Agings on a monthly basis:*
x Accounts Payable Agings on a monthly basis;*
x Borrowing Base Certificate on a monthly basis.*
* WITHIN 15 DAYS OF EACH MONTH END.
BORROWER SHALL SUBMIT TO BANK ITS 1988 BUDGET NO LATER THAN
MARCH 31, 1998.
6.17 Borrower shall maintain the following financial ratios and
covenants on a consolidated and non-consolidated basis: THE BORROWER (U.S.
ENTITY) IS TO MAINTAIN THE FOLLOWING FINANCIAL COVENANTS ON A MONTHLY
BASIS. UPON COMPLETION OF INITIAL PUBLIC OFFERING, COVENANT WILL BE
MONITORED QUARTERLY UNLESS OTHERWISE NOTED.
a. Working Capital in an amount not less than n/a.
b. Tangible Effective Net Worth in an amount not less than $9
,000,000.00 FROM THE DATE OF THIS AGREEMENT AND TNW FLOOR TO
INCREASED BY 75% OF QUARTERLY PROFIT AFTER TAX AND 100% OF NEW
EQUITY.
c. a ratio of Current Assets to Current Liabilities of not
less than N/A
d. a quick ratio of cash plus securities plus Receivables to
Current Liabilities of not less than I.3: 1.00 for the u.s.
entity . quick ratio is defined as cash and cash equivalents
plus accounts receivable divided by current liabilities which
shall include balances owed under revolving Line of Credit.
e. a ratio of Total Liabilities (less debt subordinated to
Bank) to Tangible Effective Net Worth of less than 0.75:1.00
for the consolidated entity
f. a ratio of Cash Flow to Fixed Charges of not less than N/A.
g. profitability annually on a consolidating basis for the US
entity, beginning with the year ending December 31, 1998.
h. Borrower shall not without Bank's prior written consent
acquire or expend for or commit itself to acquire or expend
for fixed assets by lease, purchase or otherwise in an
aggregate amount that exceeds five hundred thousand and No/1OO
Dollars ($500,000.00) in any fiscal year; and
i. Loan to officers shall not exceed $50.000.00 at any time:
j. Budgets, projections or other financial exhibits which the
Bank may reasonably request.
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors
and shareholders) shall be excluded from Borrower's assets for all
purposes hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor
to supply Bank) with such other information (including tax returns)
concerning its financial affairs (or that of any guarantor) as Bank may
request from time to time hereafter, and shall promptly notify Bank of any
material adverse change in Borrower's financial condition and of any
condition or event which constitutes a breach of or an event which
constitutes an Event of Default under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent
and able to pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank
for all sums expended by Bank in connection with any action brought by
Bank to correct any default or enforce any provision of this Agreement,
including all Bank Expenses; Borrower authorizes and approves all advances
and payments by Bank for items described in this Agreement as Bank
Expenses.
<PAGE> 13
Revolving
Loan & Security Agreement
(Accounts & Inventory)
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and
shall be conclusively presumed to have been relied on by Bank regardless
of any investigation made or information possessed by Bank. The
warranties, representations and agreements set forth herein shall be
cumulative and in addition to any and all other warranties,
representations and agreements which Borrower shall give, or cause to be
given, to Bank, either now or hereafter.
6.22 Borrower shall keep all of its principal bank accounts with
Bank and shall notify the Bank immediately in writing of the existence of
any other bank account, deposit account, or any other account into which
money can be deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible,
but in no event later than thirty (30) days after Borrower knows or has
reason to know that any reportable event with respect to any deferred
compensation plan has occurred, a statement of the chief financial officer
of Borrower setting forth the details concerning such reportable event and
the action which Borrower proposes to take with respect thereto, together
with a copy of the notice of such reportable event given to the Pension
Benefit Guaranty Corporation, if a copy of such notice is available to
Borrower; (b) promptly after the filing thereof with the United States
Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of
each annual report with respect to each deferred compensation plan; (c)
promptly after receipt thereof, a copy of any notice Borrower may receive
from the Pension Benefit Guaranty Corporation or the Internal Revenue
Service with respect to any deferred compensation plan; provided, however,
this subparagraph shall not apply to notice Of general application Issued
by the Pension Benefit Guaranty Corporation or the Internal Revenue
Service; and (d) when the same is made available to participants in the
deferred compensation plan, all notices and other forms of information
from time to time disseminated to the participants by the administrator of
the deferred compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic
substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits.
6.25 Borrower shall maintain insurance on the life of N/A in an
amount not to be less than NO/100 Dollars ($ n/a) under one or more
policies issued by insurance companies satisfactory to Bank, which
policies shall be assigned to Bank as security for the Obligations and on
which Bank shall be named as sole beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to
the following employees. N/A, N/A,to an aggregate of N/A Dollars ($N/A)
per N/A
7. EVENTS OF DEFAULT
Any one or more of the following events shall constitute a default by
Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any
term, provision, condition, covenant, agreement, warranty or
representation contained in this Agreement, or any other present or
future agreement between Borrower and Bank;
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents
to Bank is not true and correct;
c. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of the Borrower's Obligations (whether
of principal, interest, taxes, reimbursement of Bank Expenses, or
otherwise);
d. If there is a material impairment of the prospect of repayment of
all or any portion of Borrower's Obligations or a material
impairment of the value or priority of Bank's security interest in
the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject
to a writ or distress warrant, or are levied upon, or come into the
possession of any Judicial Officer or Assignee and the same are not
released, discharged or bonded against within ten (10) days
thereafter;
f. If any Insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;
<PAGE> 14
Revolving
Loan & Security Agreement
(Accounts & Inventory)
g. If any proceeding is filed or commenced by or against Borrower
for its dissolution or liquidation;
h. If Borrower Is enjoined, restrained or in any way prevented by
court order from continuing to conduct all or any material part of
its business affairs;
i. If a notice of lien, levy or assessment is filed of record with
respect to any or all of Borrower's assets by the United States
Government, or any department, agency or instrumentality thereof, or
by any state, county, municipal or other government agency, or if
any taxes or debts owing at any time hereafter to any one or more of
such entities becomes a lien, whether choate or otherwise, upon any
or all of the Borrower's assets and the same is not paid on the
payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon
any or all of Borrower's assets and the same is not satisfied,
dismissed or bonded against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside
computer service bureau at the time this Agreement is entered into
or during the term of this Agreement such an agreement with an
outside service bureau is entered into, and at any time thereafter,
without first obtaining the written consent of Bank, Borrower
terminates, modifies, amends or changes its contractual relationship
with said computer service bureau or said computer service bureau
fails to provide Bank with any requested information or financial
data pertaining to Bank's Collateral, Borrower's financial condition
or the results of Borrower's operations;
l. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an
acceleration of the maturity of Borrower's indebtedness to others,
whether under any indenture, agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which
has been subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty
or representation made to Bank by any officer or director of
Borrower, or if any such warranty or representation is withdrawn by
any officer or director;
o. If any party subordinating its claims to that of Bank's or any
guarantor of Borrower's Obligations dies or terminates its
subordination or guaranty, becomes insolvent or an Insolvency
Proceeding is commenced by or against any such subordinating party
or guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A percent
(___%) or more of the issued and outstanding stock of Borrower; or
r. If any reportable event, which the Bank determines constitutes
grounds for the termination of any deferred compensation plan by the
Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer
any such plan, shall have occurred and be continuing thirty (30)
days after written notice of such determination shall have been
given to Borrower by Bank, or any such Plan shall be terminated
within the meaning of Title IV of the Employment Retirement Income
Security Act ("ERISA"), or a trustee shall be appointed by the
appropriate United States District Court to administer any such
plan, or the Pension Benefit Guaranty Corporation shall institute
proceedings to terminate any plan and in case of any event described
In this Section 7.0, the aggregate amount of the Borrower's
liability to the Pension Benefit Guaranty Corporation under Sections
4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of
Borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary,
Bank shall refrain from exercising its rights and remedies and Event of
Default shall thereafter not be deemed to have occurred by reason of the
occurrence of any of the events set forth in Sections 7.e, 7.f or 7.j of
this Agreement if, within ten (10) days from the date thereof, the same is
released, discharged, dismissed, bonded against or satisfied; provided,
however, if the event is the institution of Insolvency Proceedings against
Borrower, Bank shall not be obligated to make advances to Borrower during
such cure period.
<PAGE> 15
Revolving
Loan & Security Agreement
(Accounts & Inventory)
8. BANK'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of an Event of Default by Borrower under
this Agreement, Bank may, at its election, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this
Agreement, installment notes, demand notes or otherwise,
immediately due and payable to the Bank;
b. Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, or any other
agreement between Borrower and Bank;
c. Terminate this Agreement as to any future liability or
obligation of Bank, but without affecting Bank's rights and
security interests in the Collateral, and the Obligations of
Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Bank considers
necessary or reasonable to protect its security interest in
the Collateral. Borrower agrees to assemble the Collateral if
Bank so requires and to make the Collateral available to Bank
as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, take and maintain
possession of the Collateral and the premises (at no charge to
Bank), or any part thereof, and to pay, purchase, contest or
compromise any encumbrance, charge or lien which in the
opinion of Bank appears to be prior or superior to its
security interest and to pay all expenses incurred in
connection therewith;
e. Without limiting Bank's rights under any security interest,
Bank is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights
of use of any name, trade secrets, trade names, trademarks and
advertising matter, or any property of a similar nature as it
pertains to the Collateral, in completing production of,
advertising for sale and selling any Collateral and Borrower's
rights under all licenses and all franchise agreement shall
inure to Bank's benefit, and Bank shall have the right and
power to enter into sublicense agreements with respect to all
such rights with third parties on terms acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sales and sell (in the manner
provided for herein) the Inventory;
g. Sell or dispose the Collateral at either a public or
private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such
places (including Borrower's premises) as Is commercially
reasonable in the opinion of Bank. It is not necessary that
the Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral
as follows:
(1) Bank shall give the Borrower and each holder of a
security interest in the Collateral who has filed with
Bank a written request for notice, a notice In writing
of the time and place of public sale, or, if the sale is
a private sale or some disposition other than a public
sale is to be made of the Collateral, the time on or
after which the private sale or other disposition is to
be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower's address appearing in this
Agreement, at least five (5) calendar days before the
date fixed for the sale, or at least five (5) calendar
days before the date on or after which the private sale
or other disposition is to be made, unless the
Collateral is perishable or threatens to decline
speedily in value. Notice to persons other than Borrower
claiming an interest in the Collateral shall be sent to
such addresses as they have furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also
give notice of the time and place by publishing a notice
one time at least five (5) calendar days before the date
of the sale in a newspaper of general circulation in the
county in which the sale is to be held; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection
with Bank's enforcement and exercise of any of its rights and
remedies as herein provided, whether or not Suit is commenced
by Bank;
<PAGE> 16
Revolving
Loan & Security Agreement
(Accounts & Inventory)
j. Any deficiency which exists after disposition of the
Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and
subject to the rights of third parties, to Borrower by Bank,
or, in Bank's discretion, to any party who Bank believes, in
good faith, is entitled to the excess; and
k. Without constituting a retention of Collateral in
satisfaction of an obligation within the meaning of 9505 of
the Uniform Commercial Code or an action under California Code
of Civil Procedure 726, apply any and all amounts maintained
by Borrower as deposit accounts (as that term is defined under
9105 of the Uniform Commercial Code) or other accounts that
Borrower maintains with Bank against the Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and
remedies not inconsistent herewith as provided by law or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and
no waiver by Bank of any default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election or
acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY.
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's account therefor, and
Borrower shall promptly reimburse Bank. All such sums shall become additional
indebtedness owing to Bank, shall bear interest at the rate hereinabove
provided, and shall be secured by all Collateral. Any payments made by Bank
shall not constitute (i) an agreement by it to make similar payments in the
future; or (ii) a waiver by Bank of any default under this Agreement. Bank need
not inquire as to, or contest the validity of, any such expense, tax, security
interest, encumbrance or lien and the receipt of the usual official notice of
the payment thereof shall be conclusive evidence that the same was validly due
and owing. Such payments shall constitute Bank Expenses and additional advances
to Borrower.
10. WAIVERS.
10.1 Borrower agrees that checks and other instruments received by
Bank in payment on account of Borrower's Obligations constitute only
conditional payment until such items are actually paid to Bank and
Borrower waives the right to direct the application of any and all
payments at any time or times hereafter received by Bank on account of
Borrower's Obligations and Borrower agrees that Bank shall have the
continuing exclusive right to apply and reapply such payments in any
manner as Bank may deem advisable, notwithstanding any entry by Bank upon
its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, documents,
instruments chattel paper, and guarantees at any time held by Bank on
which Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible
for (a) the safekeeping of the Inventory; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency or other person whomsoever. All
risk of loss, damage or destruction of Inventory shall be borne by
Borrower.
10.4 Borrower waives the right and the right to assert a
confidential relationship, if any, it may have with any accountant,
accounting firm and/or service bureau or consultant in connection with any
information requested by Bank pursuant to or in accordance with this
Agreement, and agrees that a Bank may contact directly any such
accountants, accounting firm and/or service bureau or consultant in order
to obtain such information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION
HEREUNDER, OR CONTEMPLATED HEREUNDER, OR ANY OTHER CLAIM (INCLUDING TORT
OR BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER ARISING BETWEEN BANK AND
BORROWER.
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails
to pursue or enforce any terms, such waiver, delay or failure to pursue or
enforce shall only be effective with respect to that single act and shall
not be construed to affect any subsequent transactions or Bank's right to
later pursue such rights and remedies.
<PAGE> 17
Revolving
Loan & Security Agreement
(Accounts & Inventory)
11. ONE CONTINUING LOAN TRANSACTION.
All loans and advances heretofore, now or at any time or times hereafter made by
Bank to Borrower under this Agreement or any other agreement between Bank and
Borrower, shall constitute one loan secured by Bank's security interests in the
Collateral and by all other security interests, liens, encumbrances heretofore,
now or from time to time hereafter granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the Obligations
are a consumer loan, that portion shall not be secured by any deed of trust or
mortgage on or other security interest in the Borrower's principal dwelling
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the Borrower (or
any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Obligation of the Borrower (or any of them), unless expressly
provided to the contrary in another place.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by either
party on the other relating to this Agreement shall be in writing and sent by
regular United States mail, postage prepaid, properly addressed to Borrower or
to Bank at the addresses stated in this Agreement, or to such other addresses as
Borrower or Bank may from time to time specify to the other in writing. Requests
to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE.
Bank is hereby authorized to make loans and advances hereunder upon telephonic
or other instructions received from anyone purporting to be an officer,
employee, or representative of Borrower, or at the discretion of Bank If said
loans and advances are necessary to meet any Obligations of Borrower to Bank.
Bank shall have no duty to make inquiry or verify the authority of any such
party, and Borrower shall hold Bank harmless from any damage, claims or
liability by reason of Bank's honor of, or failure to honor, any such
instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
Any documents, schedules, invoices or other papers delivered to Bank, may be
destroyed or otherwise disposed of by Bank six (6) months after they are
delivered to or received by Bank, unless Borrower requests, in writing, the
return of the said documents, schedules, invoices or other papers and makes
arrangements, at Borrower's expense, for their return.
15. CHOICE OF LAW.
The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the
Collateral, shall be determined according to the laws of the State of
California. The parties agree that all actions or proceedings arising in
connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or County of Santa
Clara.
16. GENERAL PROVISIONS.
16.1 This Agreement shall be binding and deemed effective when
executed by the Borrower and accepted and executed by Bank at its
Headquarter Office.
16.2 This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties, provided,
however, that Borrower may not assign this Agreement or any rights
hereunder without Bank's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Bank
shall release Borrower or any guarantor from their Obligations to Bank.
Bank may assign this Agreement and its rights and duties hereunder. Bank
reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in Bank's rights and
benefits hereunder. In connection therewith, Bank may disclose all
documents and information which Bank now or hereafter may have relating to
Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth
herein for convenience only; unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this
entire Agreement.
<PAGE> 18
Revolving
Loan & Security Agreement
(Accounts & Inventory)
16.4 Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Bank or Borrower, whether under any
rule of construction or otherwise; on the contrary, this Agreement has
been reviewed by all parties and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto. When
permitted by the context, the singular includes the plural and vice versa.
16.5 Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
16.6 This Agreement cannot be changed or terminated orally. Except
as to currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations,
if any, with respect to the subject matter hereof, are merged into this
Agreement.
16.7 The parties Intend and agree that their respective rights,
duties, powers liabilities, obligations and discretions shall be
performed, carried out, discharged and exercised reasonably and in good
faith.
IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit
Loan & Security Agreement (Accounts and Inventory) to be executed as of the date
first hereinabove written.
ATTEST: BORROWER: SCM MICROSYSTEMS, INC.
By: s/ William E. Ogdon
Title: Signature of William E. Ogdon
Accepted and effective as of SEPTEMBER 26 1997 Title: Controller
at Bank's Headquarter Office
By:
Signature of
(Bank) Title:
By: s/ Mary Beth Suhr By:
Signature of MARY BETH SUHR Signature of
Title: Vice President Title:
By:
Signature of
Title:
CA RL&S (12-94)
<PAGE> 19
STATE OF CALIFORNIA
UNIFORM COMMERCIAL CODE-FINANCING STATEMENT-FORM UCC-1 (REV. 1/90)
IMPORTANT-Read instructions on back before filling out form
This Financing Statement is presented for filing and will remain
effective, with certain exceptions, for five years from the date of filing,
pursuant to Section 9403 of the California Uniform Commercial Code. This
FINANCING STATEMENT is presented for filing pursuant to the California Uniform
Commercial Code.
<TABLE>
<S> <C> <C>
1. DEBTOR (LAST NAME FIRST--IF AN INDIVIDUAL) 1A. SOCIAL SECURITY OR FEDERAL TAX NO.
SCM MICROSYSTEMS, INC. 77-0444317
1B. MAILING ADDRESS C. CITY, STATE D. ZP CODE
131 ALBRIGHT WAY LOS GATOS, CA 95032
2. ADDITIONAL DEBTOR (IF ANY) (LAST NAME FIRST--IF AN INDIVIDUAL) SOCIAL SECURITY OR FEDERAL TAX NO.
2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE
3. DEBTOR'S TRADE NAMES OR STYLES (1F ANY) 3A. FEDERAL TAX NUMBER
4. SECURED PARTY 4A. SOCIAL SECURITY NO., FEDERAL TAX NO.
NAME COMERICA BANK-CALIFORNIA OR BANK TRANSIT AND A.B.A. NO.
MAILING ADDRESS 333 WEST SANTA CLARA STREET
CITY SAN JOSE STATE CA ZIP CODE 95113 90-3752
5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO., FEDERAL TAX NO.
NAME OR BANK TRANSIT AND A.B.A. NO.
MAILING ADDRESS
CITY STATE ZIP CODE
6. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which
located and owner of record when required by instruction 4).
***** SEE ATTACHMENT 'A' FOR COLLATERAL DESCRIPTION
7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN
ACCORDANCE WITH INSTRUCTION 5 (a) ITEM
7. CHECK 7A [X] PRODUCTS OF COLLATERAL -
IF APPLICABLE ARE ALSO COVERED (1) (2) (3) (4)
8. CHECK DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC SEC. 9105(1)(n)
IF APPLICABLE
9. DATE: 09/26/97 C 10. THIS SPACE
FOR USE OF
FILING OFFICER
0 (DATE, TIME, FILE NUMBER
D AND FILING OFFICER)
SIGNATURE(S) OF DEBTOR(S) BY: S/ WILLIAM E. OGDON E
SCM MICROSYSTEMS, INC.
TYPE OR PRINT NAME(S) OF DEBTOR(S) 2
3
SIGNATURE(S) OF SECURED PARTY(IES) 4
BY: s/ MARY BETH SUHR, VICE PRESIDENT
COMERICA BANK-CALIFORNIA 5
TYPE OR PRINT NAME(S) OF SECURED PARTY(IES)_________
6
11. Return Copy to:
7
NAME 8
ADDRESS COMERICA BANK-CALIFORNIA
CITY P.O. Box 49032 g
STATE SAN JOSE, CA 95161-9871 0
ZIP CODE
LC 5336 15-94)
UNIFORM COMMERCIAL CODE---FORM UCC-1 Filing Officer Copy
Approved by the Secretary of State STANDARD FORM~~~FILING FEE $5.00
</TABLE>
<PAGE> 20
Attachment A to UCC-2 Financing Statement Change
between COMERICA BANK-CALIFORNIA and SCM MICROSYSTEMS, INC. dated 09/26/97
The attached Financing Statement covers the following types or
items of property:
ALL ASSETS
All of the following property now owned or later acquired by Debtor, wherever
located: all accounts, general intangibles, chattel paper, contract rights,
deposit accounts, documents, instruments, inventory, returned or repossessed
goods, equipment and fixtures, and all additions, attachments, accessions,
parts, replacements, substitutions, renewals and records (Including without
limit computer software) pertaining to the foregoing property, and all products
and proceeds of any of the foregoing (whether cash or non-cash proceeds),
including without limit insurance and condemnation proceeds.
s/ WEO
Debtor(s) Initials
<PAGE> 21
EQUIPMENT
RIDER
Borrower(s): SCM MICROSYSTEMS, INC.
Borrower has entered into a certain Revolving Credit and Security Agreement
(Accounts and Inventory) or a certain Loan and Security Agreement (Accounts and
Inventory (either hereinafter referred to as "Agreement" dated September 26,
1997 with Bank (Secured Party). This EQUIPMENT RIDER (hereinafter referred to as
this Rider) dated September 26, 1997 is hereby made a part of and incorporated
into that Agreement.
1. Borrower grants to Bank a security interest in the following (hereinafter
referred to as "Equipment"):
(a) All of Borrower's present machinery, equipment, fixtures, vehicles,
office equipment, furniture, furnishings, tools, dies, jigs and
attachments, wherever located, (including but not limited to, the
items listed and described on the Schedule of Equipment attached
hereto and marked Exhibit "A" and by this reference made a part hereof
as though fully set forth hereat);
(b) all of Borrower's additional equipment, wherever located, of like or
unlike nature, to be acquired hereafter, and all replacements,
substitutes, accessions, additions and improvements to any of the
foregoing; and
(c) all of Borrowers general Intangibles, including without limitation,
computer programs, computer disks, computer tapes, literature,
reports, catalogs, drawings, blueprints and other proprietary items.
2. Bank's security interest in the Equipment as set forth above shall secure
each, any and all of Borrower's Obligations to Bank, as the term "Obligations"
is defined in the Agreement; and, the payment of Borrower's indebtedness in the
principal amount of THREE MILLION AND NO/100 Dollars ($3,000,000.00) and
interest evidenced by REVOLVING CREDIT LOAN & SECURITY AGREEMENT.
3. Bank may, in its sole discretion, from time to time hereafter, make loans
to Borrower. Loans made by Bank to Borrower pursuant to this Rider shall be
included as part of the Obligations of Borrower to Bank and at Bank's option,
may be evidenced by promissory note(s), in form satisfactory to Bank. Such loans
shall bear interest at the rate and be payable in the manner specified in said
promissory note(s) in the event Bank exercises the aforementioned option, and in
the event Bank does not, such loans shall bear interest at the rate and be
payable in the manner specified in the Agreement.
4. Borrower represents and warrants to Bank that:
(a) it has good and indefeasible title to the Equipment;
(b) the Equipment is and will be free and clear of all liens, security
interests, encumbrances and claims, except as held by Bank,
(c) the Equipment shall be kept only at the following locations: 131
Albright Way, Los Gatos, CA.
(d) the owners or mortgagees of the respective locations are:
(e) Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours to inspect and
examine the Equipment and Borrower agrees to reimburse Bank for its
reasonable costs and expenses in so doing.
5. Borrower shall keep and maintain the Equipment in good operating condition
and repair, make all necessary replacements thereto so that the value and
operating efficiency thereof shall at al [times be maintained and preserved.
Borrower shall not permit any items of Equipment to become a fixture to real
estate or accession to other property, and the Equipment is now and shall at all
times remain and be personal property.
6. Borrower, at its expense, shall keep and maintain: the Equipment insured
against loss or damage by fire, theft, explosion, sprinklers and all other
hazards and risks ordinarily insured against by other owners who use such
properties and interest in properties in similar businesses for the full
insurable value thereof; and business interruption insurance and public
liability and property damage insurance relating to Borrowers ownership and use
of its assets. All such policies of insurance shall be in such form, with such
companies and in such amounts as may be satisfactory to Bank. Borrower shall
deliver to Bank certified copies of such policies of insurance and evidence of
the payment of all premiums thereof. All such policies of insurance (except
those of public liability and property damage) shall contain an endorsement in a
form satisfactory to Bank showing loss payable to Bank and all proceeds payable
thereunder shall be payable to Bank and upon receipt by Bank shall be applied on
the account of Borrower's Obligations. To secure the payment of Borrower's
Obligations, Borrower grants Bank a security interest in and to all such
policies of insurance (except those of public liability and property' damage)
and the proceeds thereof and directs all insurers under such policies of
insurance to pay all proceeds thereof directly to Bank. Borrower hereby
irrevocably a p points Bank (and any of Bank's officers, employees or agents
designated by Bank) as Borrower's attorney-in-fact for the purpose of making,
settling and adjusting claims under such policies of insurance and for making
all determinations and decisions with respect to such policies of insurance.
Each such insurer shall agree by endorsement upon the policy or policies of
insurance issued by it to Borrower as required above, or by independent
instruments furnished to Bank that it will give Bank at least ten (10) days
written notice before any such policy or policies of insurance shall be altered
or canceled, and that no act or default of Borrower, or any other person, shall
affect the right of Bank to recover under such policy or policies of insurance
required above or to pay any premium in whole or in part relating thereto. Bank,
without waiving or releasing any obligations or defaults by Borrower
<PAGE> 22
hereunder, may at any time or times hereafter, but shall have no obligations to
do so, obtain and maintain such policies of insurance and pay such premiums and
take any other action with respect to such policies which Bank deems advisable.
All sums so disbursed by Bank, including reasonable attorney's fees, court
costs, expenses and other charges relating thereto, shall be a part of
Borrower's Obligations and payable on demand.
7. Until default by Borrower under the Agreement or this Rider, Borrower may
subject to the provisions of the Agreement and this Rider and consistent
therewith, remain in possession thereof and use t6e Equipment referred to herein
in the ordinary course of business at the location or locations hereinabove
designated.
8. All of the terms, conditions, warranties, covenants, agreements and
representations of the Agreement are incorporated herein and reaffirmed.
9. Upon a default by Borrower under the Agreement or this Rider, Borrower upon
request of Bank to do so, agrees to assemble and make the Equipment or any part
thereof available to Bank at a place designated by Bank.
10. Borrower shall upon demand by Bank immediately deliver to Bank and properly
endorse, any and all evidences of ownership, certificates of title or
applications for titles to any of the aforesaid items of Equipment.
11. Bank shall not in any way or manner be liable or responsible for (a) the
safekeeping of the Equipment; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof or (d) any act or default by any person whomsoever. All risk of Loss,
damage or destruction of' the Equipment shall be borne by Borrower.
Borrower(s): SCM MICROSYSTEMS, INC.
By: s/ William E. Ogdon
Accepted this 26TH day of SEPTEMBER 1997 at Bank's place of business in
SAN JOSE, CA 95113
By: s/ Mary Beth Suhr
CA 132 (12-94) MARY BETH SUHR, VICE PRESIDENT
<PAGE> 23
ENVIRONMENTAL RIDER
COMERICA BANK-CALIFORNIA
333 WEST SANTA CLARA STREET, SAN JOSE, CA 95113
This ENVIRONMENTAL RIDER (this "Rider") dated this 26TH day of
SEPTEMBER, 1997 is hereby made a part of and incorporated into that certain
REVOLVING CREDIT LOAN & SECURITY AGREEMENT (the "Agreement") dated September 26.
1997 between COMERICA BANK-CALIFORNIA, a California corporation ("Lender") and
SCM MICROSYSTEMS, INC. ("Borrower").
1. Borrower hereby represents, warrants and covenants that none of
the collateral or real property occupied and/or owned by Borrower has ever been
used by Borrower or any other previous owner and/or operator in connection with
the disposal of or to refine, generate, manufacture, produce, store, handle,
treat, transfer, release, process or transport any hazardous waste, as defined
in 42 U.S.C. 9601 (14) ("Hazardous Substance"), and Borrower will not at any
time use the collateral or such real property for the disposal of, refining of,
generating, manufacturing, producing, storing, handling, treating, transferring,
releasing, processing, or transporting any such Hazardous Waste and/or Hazardous
Substances.
2. None of the collateral or real property used and/or occupied by
Borrower has been designated, listed or identified in any manner by the United
States Environmental Protection Agency (the "EPA") or under and pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1960, as
amended, Set forth at 42 U.S.C. 9601 et seq. ("CERCLA") or the Resource
Conservation and Recovery Act of 1986, as amended, set forth at 42 U.S.C. 9601
et seq. ("RCRA") or any other environmental protection statute as a Hazardous
Waste or Hazardous Substance disposal or removal site, superfund or cleanup site
or candidate for removal of closure pursuant to RCRA, CERCLA or any other
environmental protection statute.
3. Borrower has not received a summons, citation, notice,
directive, letter or other communication, written or oral, from the EPA or any
other federal or state governmental agency or instrumentality, authorized
pursuant to an environmental protection statute, concerning any intentional or
unintentional action or omission by Borrower resulting in the releasing,
spilling, leaking, pumping, pouring, emitting, emptying, dumping or otherwise
disposing of Hazardous Waste or Hazardous Substance into the environment
resulting in damage thereto or to the fish, shellfish, wildlife, biota or other
natural resources.
4. Borrower shall not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part, or on the part of
any third party, on property owned and/or occupied by Borrower, any disposal,
releasing, spilling, leaking, pumping, omitting, pouring, emptying or dumping of
a Hazardous Waste or Hazardous Substance into the environment where damage may
result to the environment, fish, shellfish, wildlife, biota or other natural
resources unless such disposal, release, spill, leak, pumping, emission,
pouring, emptying or dumping is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal or state governmental
authority.
5. Borrower shall furnish to Lender:
(a) Promptly and in any event within thirty (30) days after
receipt thereof, a copy of any notice, summons, citation, directive, letter or
other communications from the EPA or any other governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with the handling, transporting, transferring,
disposal or in the releasing, spilling, leaking, pumping, pouring, emitting,
emptying or- dumping of Hazardous Waste or Hazardous Substances into the
environment resulting in damage to the environment, fish. shellfish, wildlife,
biota and any other natural resource;
(b) Promptly and in any event within thirty (30) days after the
receipt thereof, a copy of any notice of or other communication concerning the
filing of a lien upon, against or in connection with Borrower, the collateral or
Borrower's real property by the EPA or any other governmental agency or
instrumentality authorized to file such a lien pursuant to an environmental
protection statute in connection with a fund to pay for damages and/or cleanup
and/or removal costs arising from the intentional or unintentional action or
omission of Borrower resulting from the disposal or in the releasing, spilling,
leaking, pumping, pouring, emitting, emptying or dumping of Hazardous Waste or
Hazardous Substances into the environment;
(c) Promptly and in any event within thirty (30) days after the
receipt thereof, a copy of any notice, directive, letter or other communication
from the EPA or any other governmental agency or instrumentality acting under
the authority of an environmental protection statute indicating that all or any
portion of the Borrower's property or assets have been listed and/or borrowers
deemed by such agency to be the owner and operator of the facility that has
jailed to furnish to the EPA or other authorized governmental agency or
instrumentality, all the information required by the RCRA, CERCLA or other
applicable environmental protection statutes;
(d) Promptly and in no event more than thirty (30) days after
the filing thereof with the EPA or other governmental agency or instrumentality
authorized as such pursuant to an environmental protection statute, copies of
any and all information reports filed with such agency or instrumentality in
connection with Borrower's compliance with RCRA, CERCLA or other applicable
environmental protection statutes.
6. Any one or more of the following events which occur with respect
to Borrower shall constitute an event of default:
(a) The breach by Borrower of any covenant or condition,
representation or warranty contained in this Rider;
(b) The failure by Borrower to comply with each, every and all
of the requirements of RCRA, CERCLA or any other applicable environmental
protection statutes on the real property occupied and/or on owned by borrower;
<PAGE> 24
(c) The receipt by Borrower of a notice from the EPA or any
other governmental agency or instrumentality acting under the authority of any
environmental protection statute, indicating that a lien has been filed against
any of the collateral, or any of Borrower's other property by the EPA or any
other governmental agency or instrumentality in connection with a fund as a
result of damage arising from an intentional or unintentional action or omission
by Borrower resulting from the disposal, releasing, spilling, leaking, pumping,
pouring, emitting, emptying or dumping of Hazardous Substances or Hazardous
Waste into the environment; and
(d) Any other event or condition exists which might, in the
opinion of Lender, under applicable environmental protection statutes, have a
material adverse effect on the financial or operational condition of Borrower or
the value of all or any material part of the collateral or other property of
Borrower.
In witness whereof, the Borrower has agreed as of the date first set
forth above.
SCM MICROSYSTEMS, INC.
(BORROWER/PLEDGOR)
By: s/ William E. Ogdon By:
Its: Controller Its:
By: By:
Its: Its:
CA 336 (12-94)
<PAGE> 1
EXHIBIT 11.1
SCM Microsystems, Inc. and Subsidiaries
Statement of Computation of Net Income (Loss) Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three month Nine month
period ended period ended
September 30 September 30
---------------- -----------------
1997 1996 1997 1996
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net income (loss) $ 334 $ 27 $ (76) $(1,219)
Accretion on redeemable convertible preferred stock (324) (72) (802) (215)
------ ------ ------ -------
Net income (loss) attributable to common stockholders $ 10 $ (45) $ (878) $(1,434)
====== ====== ====== =======
Weighted average common shares outstanding 1,866 1,280 1,733 1,280
Weighted average convertible preferred stock 4,799 2,720 4,273 2,577
Staff Accounting Bulletin No. 83 issuances and grants (1) 675 1,361 920 1,361
------ ------ ------ -------
Shares used to compute net income (loss) per share 7,340 5,361 6,926 5,218
====== ====== ====== =======
Net income (loss) per share $ 0.05 $ 0.01 $(0.01) $ (0.23)
====== ====== ====== =======
Net income (loss) per share attributable to
common stockholders $ 0.00 $(0.01) $(0.13) $ (0.27)
====== ====== ====== =======
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock and convertible preferred stock issued for consideration below
the assumed initial public offering (IPO) price, and stock options and warrants
granted with exercise prices below the IPO price during the twelve month period
preceding the date of the initial filing of the Registration Statement, have
been included in the calculation of common equivalent shares, using the treasury
stock method, as if they were outstanding for all periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,242
<SECURITIES> 7,929
<RECEIVABLES> 8,061
<ALLOWANCES> 224
<INVENTORY> 3,487
<CURRENT-ASSETS> 22,281
<PP&E> 1,668
<DEPRECIATION> 672
<TOTAL-ASSETS> 23,277
<CURRENT-LIABILITIES> 8,131
<BONDS> 0
22,147
1
<COMMON> 2
<OTHER-SE> (7,004)
<TOTAL-LIABILITY-AND-EQUITY> 23,277
<SALES> 17,935
<TOTAL-REVENUES> 17,935
<CGS> 11,234
<TOTAL-COSTS> 11,234
<OTHER-EXPENSES> 7,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (169)
<INCOME-PRETAX> (46)
<INCOME-TAX> 30
<INCOME-CONTINUING> (76)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
