<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
REGISTRATION NO. 333-23763
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
JETFAX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3577 77-0182451
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION) NUMBER)
1376 WILLOW ROAD
MENLO PARK, CALIFORNIA 94025
(415) 324-0600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
EDWARD R. PRINCE, III
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
JETFAX, INC.
1376 WILLOW ROAD
MENLO PARK, CALIFORNIA 94025
(415) 324-0600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
CLIFFORD S. ROBBINS, ESQ. JOHN F. SEEGAL, ESQ.
SUSAN J. SKAER, ESQ. IAIN MICKLE, ESQ.
GENERAL COUNSEL ASSOCIATES LLP BRETT E. COOPER, ESQ.
1891 LANDINGS DRIVE ORRICK, HERRINGTON & SUTCLIFFE LLP
MOUNTAIN VIEW, CALIFORNIA 94043 400 SANSOME STREET
(415) 428-3900 SAN FRANCISCO, CALIFORNIA 94111
(415) 392-1122
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value................. 4,025,000 shares $10.00 $40,250,000 $12,197
=================================================================================
</TABLE>
(1) Includes 525,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- DATED MAY 12, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
3,500,000 Shares
[LOGO OF JETFAX]
Common Stock
- --------------------------------------------------------------------------------
Of the 3,500,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby, 2,750,000 shares are being offered by JetFax, Inc.
("JetFax" or the "Company") and 750,000 shares are being sold by certain
stockholders of the Company (the "Selling Stockholders"). The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. It is currently anticipated that the initial
public offering price will be between $8.00 and $10.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Company's Common Stock has been approved
for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "JTFX."
SEE "RISK FACTORS" ON PAGES 6 TO 16 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discount and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------
Total (3)................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $800,000.
(3) The Company has granted to the several Underwriters a 30-day over-allotment
option to purchase up to 525,000 additional shares of the Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discount and Commissions will be
$ , the total Proceeds to Company will be $ and the total
Proceeds to Selling Stockholders will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares of Common Stock to the
Underwriters is expected to be made at the office of Prudential Securities
Incorporated, One New York Plaza, New York, New York, on or about June ,
1997.
PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY
June , 1997
<PAGE>
[APPEARS IN SIDEBAR TO THE LEFT:]
JETFAX'S EMBEDDED SYSTEM TECHNOLOGY, BRANDED PRODUCTS AND DESKTOP SOFTWARE
SOLUTIONS MAKE JETFAX A LEADER IN THE MULTIFUNCTION PRODUCT ("MFP") MARKET.
JETFAX DEVELOPS AND PROVIDES COMPLETE HARDWARE AND SOFTWARE SOLUTIONS TO MEET
THE MULTIFUNCTION NEEDS OF OEMS AND END USERS, FROM SMALL OFFICE/HOME OFFICE
(SOHO) TO CORPORATE WORKGROUPS.
[APPEARS TO RIGHT OF SIDEBAR:]
[JETFAX LOGO]
BRANDED PRODUCTS
JetFax manufactures and
markets innovative MFP
solutions under the JetFax brand name
to corporate end users.
MULTIFUNCTION PRODUCT (MFP)
PRINT-FAX-COPY-SCAN
IN A SINGLE, INTEGRATED DEVICE
[APPEARS SIDEWAYS ON RIGHT:]
EMBEDDED SYSTEM
JetFax's proven embedded
system provides
the intelligence of the MFP,
controlling and optimizing
the print, fax, copy and scan
functions.
[APPEARS SIDEWAYS ON LEFT:]
JETSUITE SOFTWARE
JetSuite, an all-in-one
software application, enables
end users to fully utilize
the print, fax, copy and scan
capabilities of a MFP
from their desktops.
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
"JETFAX," "JETSUITE," "JETSOFT," "JETPCL," "JETFILE," "CONCORDE" AND THE
"JETFAX" LOGO ARE TRADEMARKS OF THE COMPANY. TRADEMARKS OF OTHERS ARE ALSO
REFERRED TO IN THIS PROSPECTUS.
2
<PAGE>
EMBEDDED SYSTEM
[Picture of an embedded system board featuring a "JetFax" ASIC. There is an
arrow pointing to the right and down from the picture.]
JETFAX'S PROVEN
EMBEDDED SYSTEM
TECHNOLOGY INTEGRATES
MULTIFUNCTION
CAPABILITIES.
BY UTILIZING JETFAX'S
EMBEDDED SYSTEM
EXPERTISE AND ABILITY
TO CUSTOMIZE SYSTEMS TO
OEMS' SPECIFICATIONS,
JETFAX BELIEVES
IT ENABLES ITS OEM
CUSTOMERS TO REDUCE
TIME-TO-MARKET AS WELL AS
DEVELOPMENT AND PRODUCT COSTS.
CORPORATE MARKET
[Picture of corporate users representing the corporate market. Three people are
gathered around a JetFax M5.]
JETFAX'S AWARD WINNING BRANDED
PRODUCTS ARE TARGETED
AT THE CORPORATE MFP
MARKET AND HAVE MORE
ADVANCED FEATURES THAN
THOSE FOUND ON TYPICAL
SMALL OFFICE/HOME
OFFICE (SOHO) MFPs.
THESE CORPORATE
FEATURES INCLUDE HIGHER
SCANNING AND
TRANSMISSION SPEEDS,
INCREASED MEMORY AND
PAPER CAPACITIES,
IMPROVED PERFORMANCE
AND A TWO-LINE UPGRADE.
<PAGE>
[ON LEFT SIDE BAR:]
SOHO MARKET
[Picture of SOHO user representing the SOHO market. One person sitting at a desk
talking on phone using a SOHO MFP which contains JetFax embedded system
technology.]
JETFAX SERVES THE
GROWING MARKET OF
THE SMALL OFFICE/HOME
OFFICE (SOHO) USERS BY
LICENSING ITS CORE
MULTIFUNCTION TECHNOLOGY
AND DESKTOP SOFTWARE
TO OEMs FOR USE IN
A BROAD RANGE OF
MODERATELY PRICED
PRODUCTS. SOHO USERS
ENJOY THE ECONOMIC
BENEFITS AND SPACE
SAVINGS THAT RESULT FROM
THE PURCHASE OF A SINGLE
DEVICE THAT MEETS
MULTIPLE OFFICE NEEDS.
JETSUITE SOFTWARE
[Screen picture of JetSuite software showing thumbnail pictures of documents on
a desktop. Also displayed are icons for print, fax, copy, mail and OCR. There is
an arrow pointing up and to the left of the picture.]
JETSUITE INTEGRATES PRINTING, PC FAXING, COPYING, SCANNING, DOCUMENT
MANAGEMENT AND DEVICE CONFIGURATION INTO ONE PACKAGE,
ELIMINATING THE NEED TO INSTALL AND LEARN MULTIPLE APPLICATIONS.
JETSUITE IS CURRENTLY EXPECTED TO BE RELEASED WITH SEVERAL OEM
PRODUCTS IN THE SECOND QUARTER OF 1997.
[ON RIGHT SIDE BAR:]
[JETFAX LOGO]
JETFAX LICENSES AND SELLS ITS EMBEDDED
SYSTEM TECHNOLOGY, DESKTOP SOFTWARE AND
BRANDED PRODUCTS TO A NUMBER OF
MANUFACTURERS AND
DISTRIBUTORS INCLUDING:
HEWLETT-PACKARD COMPANY
IKON OFFICE SOLUTIONS
INTEL CORPORATION
OKI DATA CORPORATION
SAMSUNG ELECTRONICS CORPORATION
XEROX CORPORATION
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, the information in this
Prospectus assumes: (i) the conversion of all outstanding Preferred Stock into
Common Stock except for the Series P Redeemable Preferred Stock, (ii) the
redemption of all outstanding shares of Series P Redeemable Preferred Stock,
(iii) the issuance of 491,317 shares of Common Stock upon the automatic net
exercise in full of certain warrants, (iv) the issuance of 144,623 shares of
Common Stock upon the conversion of cumulative unpaid dividends on the Series F
Convertible Preferred Stock and (v) that the Underwriters' over-allotment
option will not be exercised. Certain terms not otherwise defined herein are
defined in the "Glossary."
THE COMPANY
JetFax, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the
multifunction product ("MFP") market, which consists of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
The Company focuses on two distinct segments of the MFP market: the small
office/home office ("SOHO") segment and the corporate segment. According to CAP
Ventures, Inc., the total United States market for MFPs is expected to increase
from approximately $1.9 billion in 1996 to $7.6 billion in 2000, representing a
compound annual growth rate of more than 40%. Drivers of this growth include
the increasing number of SOHO offices and telecommuters, the rising demand for
cost, space and production efficiency and the expanding volume of information
conveyed through fax, the Internet and e-mail. Rather than making several trips
to a fax or copier, queuing for a particular office device or purchasing and
maintaining multiple single-function office devices, today's office workers can
perform print, fax, copy and scan functions with one device that provides
nearly seamless document management directly from their desktops.
The Company's embedded system technology consists of proprietary ASICs,
software and firmware that reside on a modular controller circuit board (an
"embedded system"). This technology provides the intelligence of a MFP and
coordinates, controls and optimizes a MFP's printing, faxing, copying and
scanning operations. JetFax licenses and manufactures its embedded system and
desktop software for a range of MFP solutions sold under the JetFax brand name
and the brand names of its OEM customers. With outsourcing becoming
increasingly attractive to OEMs, JetFax believes it has a number of advantages
over competitive suppliers of MFP technology due to its proven industry
expertise and its ability to offer OEMs a variety of advanced solutions. The
Company believes its embedded system technology and desktop software enable
OEMs to offer more competitive products with improved price/performance,
shortened development cycles and reduced development and product costs. The
Company currently licenses its embedded system technology or desktop software
to 25 licensees worldwide, including Hewlett-Packard Company, Oki Data
Corporation, Samsung Electronics Corporation, Xerox Corporation and Intel
Corporation. For example, effective in January 1997, the Company entered into a
development and license agreement with Hewlett-Packard for the inclusion of
JetFax embedded system technology and JetSuite software in a Hewlett-Packard
product which is currently under development.
Since its inception in 1988, the majority of the Company's revenues have been
generated from sales of JetFax branded products and consumables, including the
JetFax M5, the Company's current branded product. A substantial portion of the
Company's branded products sales is through IKON Office Solutions, one of the
leading distributors of office equipment. The Company believes that it offers
the most advanced and innovative MFP solutions currently available in its
product class. For example, the JetFax M5 was the first MFP to support two
telephone lines for simultaneous receiving and sending of faxes, and the
Company was one of the first to market a MFP with a high speed 33.6 Kbps modem.
JetFax has received a number of highly acclaimed industry awards and
distinctions for its innovative contributions to MFP technology, including the
following for the JetFax M5: Buyer's Laboratory's "Pick of the Year" in 1996,
"Editor's Choice '96 for Premium Laser Fax" by Better Buys for Business and
"Win 100" for top computer hardware products in 1996 by Windows Magazine.
3
<PAGE>
The Company believes its JetSuite software will define a new category of all-
in-one software for MFPs that will replace the piecemeal software applications
historically bundled by MFP vendors. JetSuite's portable document software
enables a user to view, manage, transmit and process information from the
desktop, providing full fax, scan, optical character recognition, print, copy
and e-mail functionality. As a result, SOHO and corporate workers can increase
productivity and realize substantial time and cost savings relative to
traditional office protocols and equipment usage. The Company's JetSuite
desktop software can be sold on a stand-alone basis or bundled with the JetFax
embedded system to provide a complete, integrated hardware and software
solution. The Company plans to release JetSuite with several OEM products in
the third quarter of 1997. The Company also offers JetPCL software, which
provides high quality conversion of documents encoded in Hewlett-Packard's
Printer Control Language ("PCL"), the industry standard.
The Company's objective is to become a leading, single source for
multifunction products and solutions providing proven embedded system
technology, high quality branded products and advanced desktop software. To
accomplish this goal, JetFax intends to (i) penetrate the SOHO market through
OEM licensing agreements of the JetFax embedded system and JetSuite software,
(ii) increase the installed base of JetFax's branded products and related
higher margin consumables, upgrades and accessory sales, (iii) establish
JetSuite as an industry standard in the MFP market, (iv) leverage the Company's
experience and relationships in international markets and (v) continue to
anticipate the needs of the MFP market and respond with innovative, complete
MFP solutions.
The Company's executive offices are located at 1376 Willow Road, Menlo Park,
California 94025, and its telephone number is (415) 324-0600. The Company was
incorporated in Delaware in August 1988.
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company.......... 2,750,000 shares
Common Stock Offered by the Selling
Stockholders................................ 750,000 shares
Common Stock to be Outstanding after the
Offering.................................... 10,693,470 shares (1)
Use of Proceeds by the Company............... For redemption of Series P Redeemable
Preferred Stock, payment of acquisition
obligations, repayment of indebtedness,
working capital and general corporate
purposes.
Nasdaq National Market Symbol................ JTFX
</TABLE>
- --------
(1) Excludes (i) 1,160,635 shares of Common Stock issuable upon exercise of
stock options outstanding at March 31, 1997 under the Company's stock
option plans with a weighted average exercise price of $1.22 per share,
(ii) 401,999 shares of Common Stock issuable upon exercise of options
granted outside of the Company's stock option plans with an exercise price
of $1.72 per share, (iii) 388,500 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $2.75 per share and (iv) 100,000 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $1.75 per share. See "Management--Incentive Stock Plans," "Certain
Transactions" and Note 10 of Notes to Financial Statements.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED QUARTER ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31, MARCH 31,
------------------------------------- ------------------ ----------------
1993 1994 1995 1996 1995 1996 (1) 1996 1997(1)
-------- -------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product............... $ 4,542 $ 6,086 $ 6,413 $ 11,143 $ 7,336 $ 10,205 $ 3,807 $ 4,250
Development fees...... -- 75 1,200 699 466 1,416 233 743
Software and
technology license
fees................. -- -- 139 1,345 667 1,241 678 223
-------- -------- ------- -------- -------- -------- ------- -------
Total revenues....... 4,542 6,161 7,752 13,187 8,469 12,862 4,718 5,216
Costs and expenses:
Cost of product
revenues............. 3,695 5,486 5,249 11,102 7,793 8,495 3,309 2,979
Research and
development.......... 1,397 1,311 1,118 1,249 919 1,709 330 1,477(2)
Selling and marketing. 633 1,303 1,325 2,710 1,745 2,785 965 972
General and
administrative....... 1,019 615 746 750 500 823 250 352
-------- -------- ------- -------- -------- -------- ------- -------
Total costs and
expenses............ 6,744 8,715 8,438 15,811 10,957 13,812 4,854 5,780
-------- -------- ------- -------- -------- -------- ------- -------
Loss from operations... (2,202) (2,554) (686) (2,624) (2,488) (950) (136) (564)
Interest and other
income (expense)...... (18) (5) (68) (270) (192) 13 (78) (27)
-------- -------- ------- -------- -------- -------- ------- -------
Loss before
extraordinary item and
income taxes.......... (2,220) (2,559) (754) (2,894) (2,680) (937) (214) (591)
Provision for income
taxes................. -- -- -- 35 35 105 -- 45
-------- -------- ------- -------- -------- -------- ------- -------
Loss before
extraordinary item.... (2,220) (2,559) (754) (2,929) (2,715) (1,042) (214) (636)
Extraordinary item (3). -- -- 349 -- -- -- -- --
-------- -------- ------- -------- -------- -------- ------- -------
Net loss............... $ (2,220) $ (2,559) $ (405) $ (2,929) $ (2,715) $ (1,042) $ (214) $ (636)
======== ======== ======= ======== ======== ======== ======= =======
PRO FORMA DATA (4):
Net loss per share..... $ (0.14) $ (0.08)
======== =======
Common and common
equivalent shares used
in computing net loss
per share............. 8,454 8,474
======== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED (5)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................... $ 1,564 $ 19,867
Total assets.................................................................. 8,020 24,979
Long-term note payable, less current portion.................................. 181 --
Redeemable preferred stock.................................................... 2,764 --
Total stockholders' equity.................................................... 101 21,319
</TABLE>
- --------
(1) Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. The 40-week period from April 1, 1996 to January 4, 1997
is referred to herein as the nine months ended December 31, 1996. For
presentation purposes, the Company refers to its reporting year ended
January 4, 1997 as ending on December 31, 1996 and the 13-week period from
January 5, 1997 to April 5, 1997 is referred to herein as the quarter ended
March 31, 1997.
(2) Includes $551,000 of expenses related to the acquisition of the Crandell
Group, Inc. by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Represents a gain on exchange of stockholder debt and receivables for notes
payable. See Note 2 of Notes to Financial Statements.
(4) For an explanation of the determination of the number of shares used in
computing pro forma net loss per share, see Note 1 of Notes to Financial
Statements.
(5) Reflects (i) the conversion of each of the outstanding shares of
convertible preferred stock, except the Series P Redeemable Preferred
Stock, upon the closing of the Offering, (ii) the redemption of all
outstanding shares of Series P Redeemable Preferred Stock, (iii) the
issuance of 491,317 shares of Common Stock upon the automatic net exercise
in full of certain warrants upon the closing of the Offering, (iv) the
issuance of 144,623 shares of Common Stock upon the conversion of
cumulative unpaid dividends on the Series F Convertible Preferred Stock
upon the closing of the Offering and (v) the sale by the Company of the
2,750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share, after deducting the underwriting
discount and commissions and estimated offering expenses, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934 regarding events,
conditions and financial trends that may affect the Company's future plans of
operations, business strategy, results of operations and financial position.
Prospective investors are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. The Company had net losses
of approximately $405,000, $2.9 million, $1.0 million and $636,000 for the
fiscal years ended March 31, 1995 and March 31, 1996, the nine months ended
December 31, 1996 and the quarter ended March 31, 1997, respectively. The
Company's historical losses and certain preferred stock dividends have
resulted in an accumulated deficit of approximately $14.6 million as of March
31, 1997. There can be no assurance that the Company will achieve
profitability on a quarterly or annual basis in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company in the past has
experienced, and in the future may experience, significant fluctuations in
quarterly operating results that have been or may be caused by many factors
including: the timing of introductions of new products or product enhancements
by the Company, its OEMs and their competitors; initiation or termination of
arrangements between the Company and its existing and potential significant
OEM customers or dealers and distributors; the size and timing of and
fluctuations in end user demand for the Company's branded products and OEM
products incorporating the Company's technology; inventories of the Company's
branded products or products incorporating the Company's technology carried by
the Company, its distributors or dealers, its OEMs or the OEMs' distributors
that exceed current or projected end user demand; the phase-out or early
termination of the Company's branded products or OEM products incorporating
the Company's technology; the amount and timing of development agreements,
one-time software licensing transactions and recurring licensing fees; non-
performance by the Company, its suppliers or its OEM or other customers
pursuant to their plans and agreements; seasonal trends; competition and
pricing; customer order deferrals and cancellations in anticipation of new
products or product enhancements; industry and technology developments;
changes in the Company's operating expenses; software and hardware defects;
product delays or product quality problems; currency fluctuations; and general
economic conditions. The Company expects that its operating results will
continue to fluctuate significantly as a result of these and other factors.
For example, during the fiscal year ended March 31, 1996, the Company recorded
a $760,000 loss on a purchase commitment with a supplier due to a reduction in
the selling price of the Company's product. A substantial portion of the
Company's operating expenses is related to personnel, development of new
products, marketing programs and facilities. The level of spending for such
expenses cannot be adjusted quickly and is based, in significant part, on the
Company's expectations of future revenues and anticipated OEM commitments. If
such commitments do not result in revenues or operating expenses are
significantly higher, the Company's business, financial condition and results
of operations will be adversely affected, which could have a material adverse
effect on the price of the Company's Common Stock.
Furthermore, the Company has often recognized a substantial portion of its
revenues in the last month of a quarter, with such revenues frequently
concentrated in the last weeks or days of a quarter. The Company's branded
products are primarily sold through dealers, and such dealers often place
orders for products at or near the end of a quarter. As a result, because one
or more key orders that are scheduled to be booked and shipped at
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the end of a quarter may be delayed until the beginning of the next quarter or
cancelled, revenues for future quarters are not predictable with any
significant degree of accuracy. For these and other reasons, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indicators of
future performance. It is likely that in future quarters, the Company's
operating results, from time to time, will be below the expectations of public
market analysts and investors, which could have a material adverse effect on
the price of the Company's Common Stock.
The accuracy of quarterly license revenues from OEMs reported by the Company
has been, and the Company believes will continue to be, dependent on the
timing and accuracy of product sales reports received from the Company's OEMs.
These reports are provided only on a quarterly basis (which may not coincide
with the Company's quarter) and are subject to delay and potential revision by
the Company's OEMs. Therefore, the Company is required to estimate all of the
recurring license revenues from OEMs for each quarter. As a result, the
Company will record an estimate of such revenues prior to public announcement
of the Company's quarterly results. In the event the product sales reports
received from the Company's OEMs are delayed or subsequently revised, the
Company may be required to restate its recognized revenues or adjust revenues
for subsequent periods, which could have a material adverse effect on the
Company's business, financial condition and results of operations and the
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE ON THE MFP MARKET. The market for MFPs is relatively new and
rapidly evolving. The Company's future success is dependent to a significant
degree upon broad market acceptance of the type of MFPs on which the Company
is focusing its development efforts. This success will be dependent in part on
the ability of the Company and its OEM customers to develop MFPs that provide
the functionality, performance, speed and connectivity demanded by the market
at acceptable price points and to convince end users to broadly adopt MFPs for
office and home office use. There can be no assurance that the market for MFPs
will continue to develop, that the Company and its OEM customers will be
successful in developing MFPs that gain broad market acceptance, that the
Company will be able to offer in a timely manner its embedded system
technology, branded products or desktop software or that the Company's OEM
customers will choose the Company's technology for use in their MFPs. The
failure of any of these events to occur would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Customers."
RISKS ASSOCIATED WITH CHANGE IN FOCUS OF THE COMPANY'S BUSINESS. The Company
has historically focused primarily on the development, manufacture and sale of
its branded MFPs and currently derives a substantial portion of its revenues
from the sale of its branded MFPs. The Company expects that its revenue
growth, commencing in 1997, will be dependent, in part, on increased licensing
of the Company's embedded system technology and desktop software products.
However, there can be no assurance that the Company will realize growth in
revenues from sales and licensing of its embedded system technology or desktop
software. If such growth in revenues does not occur and if revenues from the
sale of the Company's branded MFPs were not to continue at past growth rates,
due either to a change in the Company's deployment of resources or otherwise,
it could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--JetFax Strategy."
RISKS ASSOCIATED WITH INCREASED FOCUS ON MFP DESKTOP SOFTWARE
BUSINESS. Commencing in the second half of 1997, the Company expects that its
business, financial condition and results of operations will be more dependent
on sales of its MFP desktop software, particularly JetSuite, which will be
sold both separately and bundled with the Company's branded products and
embedded system technology. JetSuite is expected to be released with several
OEM products in the third quarter of 1997. There can be no assurance that such
release will not be delayed or that errors will not be found in new products,
including JetSuite, after commencement of commercial shipments. Such errors
may result in a delay in market acceptance or a product recall. In July 1996,
the Company acquired substantially all of the assets of Crandell Group, Inc.
(the "Crandell Acquisition"), a developer of desktop software products (the
"Crandell Group"). Prior to the Crandell Acquisition, the Company had limited
experience in developing, marketing and supporting desktop software products.
The Company's on-going ability to develop its MFP desktop software products
business will depend upon several factors, including,
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but not limited to, the commercial acceptance of the Company's MFP desktop
software products, upgrades and add-on software products, the ability of the
Company's personnel and distribution channels to sell and support MFP desktop
software products and the Company's ability to continue to integrate the
operations and personnel of the Crandell Group into the Company. Because the
market for MFP desktop software products is new and emerging, there can be no
assurance that a significant market, if any, will develop for sales of the
Company's MFP desktop software products, or for sales of upgrades and add-on
software products, and such a failure would likely have a material adverse
effect on the Company's MFP desktop software products business. There can be
no assurance that the Company's MFP desktop software products business will be
successful. Any failure by the Company to develop a successful MFP desktop
software products business would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products," "--Technology" and "Certain Transactions."
DEPENDENCE ON DEALERS AND DISTRIBUTORS. The Company has derived a
substantial portion of its revenues from sales of its branded MFPs through
dealers and distributors. The Company expects that sales of these products
through its dealers and distributors will continue to account for a
substantial portion of its revenues for the foreseeable future. The Company
currently maintains distribution relationships with dealers associated with
IKON Office Solutions (formerly Alco Standard), a national group of office
equipment dealers ("IKON"). Sales to these IKON dealers accounted for 13%, 21%
and 25% of the Company's total revenues in the fiscal year ended March 31,
1996, the nine months ended December 31, 1996 and the quarter ended March 31,
1997, respectively. Sales to A. Messerli AG ("Messerli"), one of the Company's
office equipment dealers located in Switzerland, accounted for 11%, 10% and 4%
of the Company's total revenues in the fiscal year ended March 31, 1996, the
nine months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. Each of the Company's dealers and distributors can cease
marketing the Company's products with limited notice and with little or no
penalty. There can be no assurance that the Company's dealers and distributors
will continue to offer the Company's products or that the Company will be able
to recruit additional or replacement dealers and distributors. The loss of one
or more of the Company's major dealers and distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's dealers and distributors also offer competitive
products manufactured by third parties. There can be no assurance that the
Company's dealers and distributors will give priority to the marketing of the
Company's products as compared to its competitors' products. Any reduction or
delay in sales of the Company's products by its dealers and distributors could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business --Sales and Marketing."
DEPENDENCE ON OEMS. The Company has derived a significant portion of its
revenues from licensing of its embedded system technology and software and
from development services to OEMs. The Company currently has OEM relationships
with Hewlett-Packard Company ("Hewlett-Packard"), Oki Data Corporation ("Oki
Data"), Samsung Electronics Corporation ("Samsung") and Xerox Corporation
("Xerox"). Revenues from these OEMs accounted for 18%, 16%, 17% and 17% of the
Company's total revenues in the fiscal years ended March 31, 1995 and March
31, 1996, the nine months ended December 31, 1996 and the quarter ended
March 31, 1997, respectively. Revenues from Xerox accounted for 17%, 11%, 6%
and less than 1% of the Company's total revenues in the fiscal years ended
March 31, 1995 and March 31, 1996, the nine months ended December 31, 1996 and
the quarter ended March 31, 1997, respectively. In the quarter ended March 31,
1997, Hewlett-Packard accounted for 11% of the Company's total revenues, and
was the only OEM customer that accounted for greater than 10% of the Company's
total revenues in such period. The Company anticipates that a significant
portion of its revenues will be derived from OEMs in the future and that the
Company's revenues will be increasingly dependent upon, among other things,
the ability and willingness of OEMs to timely develop and promote MFPs that
incorporate the Company's technology. The ability and willingness of these
OEMs to do so is based upon a number of factors, such as the timely
development by the Company and the OEMs of new products with additional
functionality, increased speed and enhanced performance at acceptable prices
to end users; development costs of the OEMs; licensing and development fees of
the Company; compatibility with emerging industry standards; technological
advances; intellectual property issues; general industry competition; and
overall economic conditions. Many of these factors are beyond the control of
the Company and its OEMs. Many OEMs,
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including some of the Company's OEM customers, are concurrently developing and
promoting MFPs that do not incorporate the Company's technology. In such
cases, the OEMs may have profitability or other incentives to promote internal
solutions or competing products in lieu of products incorporating the
Company's technology. No assurance can be given as to the ability or
willingness of the Company's OEMs to continue developing, marketing and
selling products incorporating the Company's technology. For example, the
Company no longer receives royalties from the Xerox WorkCenter 250 MFP, which
incorporated the Company's embedded system technology, as Xerox has ceased
production of that model due to the product reaching the end of its life cycle
and pricing pressures from competitors' products. The loss of any of the
Company's significant OEMs could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Customers."
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE. The market for the Company's
products and services is characterized by rapidly changing technology,
evolving industry standards and needs, and frequent new product introductions.
The Company currently derives all of its revenues from the sale of its branded
MFPs and related consumables, the licensing of its technology and software,
and the provision of related development services. The Company anticipates
that these sources of revenues will continue to account for substantially all
of its revenues for the foreseeable future. The market expects the Company and
its OEMs to develop and release, in a regular and timely manner, new MFPs with
better performance and improved features at competitive price points. As the
complexity of product development increases and the expected time-to-market
continues to decrease, the risk and difficulty in meeting such schedules
increase as well as the costs to the Company and its OEMs. In addition, the
Company, its OEMs and their competitors, from time to time, may announce new
products, capabilities or technologies that may replace or shorten the life
cycles of the Company's branded products and software and the OEM products
incorporating the Company's technology. The Company's success will depend on,
among other things, market acceptance of the Company's branded products,
software and embedded system technology and the demand for MFPs by the
Company's OEM customers; the ability of the Company and its OEM customers to
respond to industry changes and market demands in a timely manner; achievement
of new design wins by the Company in the Company's development of its branded
products as well as the OEMs' development of associated new MFPs; the ability
of the Company and its OEM customers to reduce production costs; and the
regular and continued introduction of new and enhanced technology, services
and products by the Company and its OEMs on a timely and cost-effective basis.
There can be no assurance that the products and technology of competitors of
the Company or its OEMs will not render the Company's branded products,
technology, software or its OEMs' products noncompetitive or obsolete. Any
failure by the Company or its OEMs to anticipate or respond adequately to the
rapidly changing technology and evolving industry standards and needs, or any
significant delay in development or introduction of new and enhanced products
and services, could result in a loss of competitiveness or revenues, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Research and Development."
RELIANCE ON LIMITED PRODUCT LINE. The Company has been primarily engaged in
the development, manufacture and sale of MFPs and related technology and has
derived a substantial portion of its revenues from sales of its branded MFPs
and consumables. Sales of the Company's branded products and related
consumables accounted for 83%, 84%, 79% and 81% of the Company's total
revenues in the fiscal years ended March 31, 1995 and March 31, 1996, the nine
months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. Dependence on a single product line makes the Company
particularly vulnerable to the successful introduction of competitive
products. The Company currently derives a substantial portion of its branded
product revenues from sales of the JetFax M5. Sales of the JetFax M5 (which
began shipping commercially in June 1995) and related consumables and upgrades
accounted for 48%, 64% and 71% of the Company's total revenues in the fiscal
year ended March 31, 1996, the nine months ended December 31, 1996 and the
quarter ended March 31, 1997, respectively. A reduction in demand for the
JetFax M5, or the Company's failure to timely introduce its next MFP, would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Products."
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RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND INTRODUCTION; PRODUCT
DELAYS. The Company's future success is dependent to a significant degree on
its ability to further develop its embedded system technology and software for
MFPs in the time frame required by its OEM and other customers and to develop
technology with the quality, speed and other specifications required by its
OEM and other customers. The Company in the past has experienced delays in
product development, and the Company may experience similar delays in the
future. Prior delays have resulted from numerous factors such as changing OEM
product specifications, delays in receiving necessary components, difficulties
in hiring and retaining necessary personnel, difficulties in reallocating
engineering resources and other resource limitation difficulties with
independent contractors, changing market or competitive product requirements
and unanticipated engineering complexity. The Company has experienced delays
in one of its current development projects and, pursuant to certain provisions
of its development agreement, the final milestone payment thereunder could be
reduced. In addition, the Company's software and hardware have in the past,
and may in the future, contain undetected errors or failures that become
evident upon product introduction or as product production volumes increase.
There can be no assurance that errors will not be found; that the Company will
not experience problems or delays in meeting the delivery schedules for or in
the acceptance of products by the Company's OEMs or other customers; that
there will not be problems or delays in shipments of the Company's branded
products or OEMs' products; or that the Company's new products and technology
will meet performance specifications under all conditions or for all
anticipated applications. Given the short product life cycles in the MFP
market, any delay or difficulty associated with new product development,
introductions or enhancements could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products," "--Technology" and "--Research and Development."
HIGHLY COMPETITIVE INDUSTRY. The market for MFPs and related technology and
software is highly competitive and characterized by continuous pressure to
enhance performance, to introduce new features and to accelerate the release
of new products. The Company's branded products compete primarily with the
dominant vendors in the fax market, all of whom have substantially greater
resources than the Company and include, among others, Canon Inc., Panasonic, a
division of Matsushita Electrical Industrial Co., Ltd., Pitney Bowes Inc.,
Ricoh Co. Ltd., Sharp Electronics Corporation and Xerox. The Company also
competes on the basis of vendor name and recognition, technology and software
expertise, product functionality, development time and price.
The Company's technology, development services and software primarily
compete with solutions developed internally by OEMs. Virtually all of the
Company's OEMs have significant investments in their existing solutions and
have the substantial resources necessary to enhance existing products and to
develop future products. These OEMs have or may develop competing
multifunction technologies and software which may be implemented into their
products, thereby replacing the Company's proposed or current technologies,
eliminating a need for the Company's services and products to these OEMs. The
Company also competes with technologies, software and development services
provided in the MFP market by other systems and software suppliers to OEMs.
With respect to MFP embedded system technologies, the Company competes with,
among others, Peerless Systems Corporation, Personal Computer Products, Inc.
and Xionics Document Technologies, Inc. With respect to desktop software, the
Company competes with, among others, Caere Corporation, Simplify Development
Corporation, Smith Micro Software, Inc., Visioneer Inc., Wordcraft
International and Xerox.
As the MFP market continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future markets with similar
or substitute products or technologies. Software solutions may also be
introduced by competitors that are less costly or provide better performance
or functionality. The Company anticipates increasing competition for its MFPs,
technologies and software under development. Most of the Company's existing
competitors, many of its potential competitors and all of the Company's OEMs
have substantially greater financial, technical, marketing and sales resources
than the Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the price of its branded products,
to reduce the amount of royalties received on new licenses and to reduce the
fees for its development services in order to maintain existing business and
generate additional product sales and license and development revenues, which
could reduce profit margins and result in losses and a decrease in market
share. No assurances can be given as to
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the ability of the Company to compete favorably with the internal development
capabilities of its current and prospective OEM customers or with other third-
party vendors, and the inability to do so would have a material adverse effect
on the Company's business, financial condition and results of operations.
EFFECT OF RAPID GROWTH ON EXISTING RESOURCES; POTENTIAL ACQUISITIONS. The
Company has grown rapidly in recent years. A continuing period of rapid growth
could place a significant strain on the Company's management, operations and
other resources. The Company's ability to manage its growth will require it to
continue to invest in its operational, financial and management information
systems, procedures and controls, and to attract, retain, motivate and
effectively manage its employees. The Company recently installed and
implemented a new management information system and used the accounting
applications of the system for the first time in connection with the December
31, 1996 monthly accounting close. The Company has also begun using the
manufacturing applications for inventory control and product ordering.
However, further improvements in these systems are needed and will continue to
be needed in order to manage additional growth in revenues and assets. There
is no guarantee that the implementation of the management information system
will contribute to the Company's ability to manage its growth and,
furthermore, any problems encountered as a result of the implementation of
such system, including additional modules and features, could adversely affect
the Company's operations. There can be no assurance that the Company will be
able to manage its growth effectively and to successfully utilize the new
management information system, and failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing and Operations."
The Company may, from time to time, pursue the acquisition of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect
the Company's operating results, including the diversion of management's
attention, the assimilation of the operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential
loss of key employees. JetFax has no present commitments nor is it engaged in
any discussions or negotiations with respect to possible acquisitions. No
assurance can be given that any acquisition by the Company will not materially
and adversely affect the Company or that any such acquisition will enhance the
Company's business.
DEPENDENCE ON OUTSIDE SUPPLIERS; DEPENDENCE ON SOLE SOURCE SUPPLIERS. The
Company relies on various suppliers of components for its products. Many of
these components are standard and generally available from multiple sources.
However, there can be no assurance that alternative sources of such components
will be available at acceptable prices or in a timely manner. The Company
generally buys components under purchase orders and does not have long-term
agreements with its suppliers. Although alternate suppliers may be readily
available for some of these components, for other components it could take an
undetermined amount of time to qualify a replacement supplier and order and
receive replacement components. The Company does not always maintain
sufficient inventory to allow it to fill customer orders without interruption
during the time that would be required to obtain an adequate supply of single
sourced components. Although the Company believes it could develop other
sources for single source components, no alternative source currently exists
and the process could take several months or longer. Therefore, any
interruption in the supply of such components could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Many of the components used in the Company's products are purchased from
suppliers located outside the United States. Foreign manufacturing facilities
are subject to risk of changes in governmental policies, imposition of tariffs
and import restrictions and other factors beyond the Company's control. There
can be no assurance that United States or foreign trading policies will not
restrict the availability of components or increase their cost. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Certain components used in the Company's products are available only from
one source. The Company is dependent on Oki America, Inc. ("Oki America"), as
the supplier of major components, including the printer engine, of the JetFax
M5. Oki America is also a competitor of the Company. The Company is also
dependent on
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American Microsystems, Inc. ("AMI") to provide unique application specific
integrated circuits ("ASICs") incorporating the Company's imaging and logic
circuitry, Motorola, Inc. ("Motorola") to provide microprocessors, Pixel
Magic, Inc., a subsidiary of Oak Technology, Inc. ("Pixel"), to provide a
specialized imaging processor and Rockwell Semiconductor Systems ("Rockwell")
to provide modem chips. If Oki America, AMI, Motorola, Pixel or Rockwell were
to limit or reduce the sale of such components to the Company, or if such
suppliers were to experience financial difficulties or other problems which
prevented them from supplying the Company with the necessary components, it
could have a material adverse effect on the Company's business, financial
condition and results of operations. These sole source providers are subject
to quality and performance issues, materials shortages, excess demand,
reduction in capacity and/or other factors that may disrupt the flow of goods
to the Company or its customers and thereby adversely affect the Company's
business and customer relationships. Any shortage or interruption in the
supply of any of the components used in the Company's products, or the
inability of the Company to procure these components from alternate sources on
acceptable terms, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Manufacturing and Operations."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT. The
Company's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company has no patents or patent applications
pending. As part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants, OEMs and
strategic partners and limits access to and distribution of its designs,
software and other proprietary information. Despite these efforts, the Company
may be unable to effectively protect its proprietary rights and, in any event,
enforcement of the Company's proprietary rights may be expensive. The
Company's source code also is protected as a trade secret. However, the
Company from time to time licenses portions of its source code and designs to
OEMs and also places such source code and designs in escrow to be released to
OEMs in certain circumstances, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information. Further, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on the
Company's technology increasingly may become the subject of infringement
claims. The Company has in the past received communications from third parties
asserting that the Company's trademarks or products infringe the proprietary
rights of third parties or seeking indemnification against such infringement.
The Company is generally required to agree to indemnify its OEMs from third
party claims asserting such infringement. There can be no assurance that third
parties will not assert infringement claims against the Company or its OEMs in
the future. Any such claims, regardless of merit, could be time consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation to determine the
validity of any claims, whether or not such litigation is determined in favor
of the Company, could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel from daily
operations. In addition, the Company may lack sufficient resources to initiate
a meritorious claim. In the event of an adverse ruling in any litigation
regarding intellectual property, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing or substituted technology. The failure of the Company
to develop, or license on acceptable terms, a substitute technology could have
a material adverse affect on the Company's business, financial condition and
results of operations. See "Business--Intellectual Property and Proprietary
Rights."
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DEPENDENCE ON KEY PERSONNEL. The Company is largely dependent upon the
skills and efforts of its senior management, particularly Edward R. Prince,
III ("Rudy Prince"), its President and Chief Executive Officer, and Lon Radin,
its Vice President of Engineering, and other officers and key employees, some
of whom only recently have joined the Company. The Company maintains key
person life insurance policies on Rudy Prince and Lon Radin. None of the
Company's officers or key employees, other than Michael Crandell, Vice
President of Software, are covered by an employment agreement with the
Company. The Company believes that its future success will depend in large
part upon its ability to attract and retain highly skilled engineering,
managerial, sales, marketing and operations personnel, many of whom are in
great demand. Competition for such personnel, especially engineering, has
recently increased significantly. The loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management."
INTERNATIONAL ACTIVITIES. Revenues from sales to the Company's customers
outside the United States accounted for 22%, 39%, 26% and 24% of the Company's
total revenues for the fiscal years ended March 31, 1995 and March 31, 1996,
the nine months ended December 31, 1996 and the quarter ended March 31, 1997,
respectively. The Company expects that revenues from customers located outside
the United States may increase in both absolute dollars and as a percentage of
total revenues in the future. The international market for the Company's
branded products and products incorporating the Company's technology and
software is highly competitive, and the Company expects to face substantial
competition in this market from established and emerging companies and
technologies developed internally by its OEM customers. Risks inherent in the
Company's international business activities also include currency fluctuations
and restrictions, the burdens of complying with a wide variety of foreign laws
and regulations, including Postal, Telephone and Telegraph ("PTT")
regulations, longer accounts receivable cycles, the imposition of government
controls, risks of localizing and internationalizing products to local
requirements in foreign countries, trade restrictions, tariffs and other trade
barriers, restrictions on the repatriation of earnings and potentially adverse
tax consequences, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Substantially all of the Company's international sales are currently
denominated in U.S. dollars and, therefore, increases in the value of the U.S.
dollar relative to foreign currencies could make the Company's products less
competitive in foreign markets. Because of the Company's international
activities, it faces certain currency exposure and translation risks. To date,
the Company has not hedged against currency exposure or translation risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON SINGLE MANUFACTURING FACILITY; RISKS RELATED TO POTENTIAL
DISRUPTION. The Company's manufacturing operations are located in its facility
in Northern California. In addition, a number of the suppliers of components
for the Company's products and providers of outsourced assembly, upon which
the Company relies, are located in Northern California. Since the Company does
not currently operate multiple facilities in different geographic areas, or
have alternative sources for many of its components or outsourced assembly, a
disruption of the Company's manufacturing operations, or the operations of its
suppliers, resulting from sustained process abnormalities, human error,
government intervention or natural disasters such as earthquakes, fires or
floods could cause the Company to cease or limit its manufacturing operations
and consequently have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Manufacturing
and Operations."
CERTAIN CHARGES TO BE INCURRED THROUGH THE CLOSING OF THE OFFERING. Through
the closing of the Offering, the Company will incur certain significant
additional charges relating to the Crandell Acquisition. Based upon an assumed
closing date of June 30, 1997 and an assumed initial public offering price of
$9.00 per share, the Company anticipates such additional charges to be
approximately $1.2 million with no related tax benefit due to the Company's
operating losses. Such charges relate to noncash compensation of $200,000 from
a variable warrant issued to the selling stockholder/employees of the Crandell
Group and a payment of approximately $1.0 million required to be paid at the
closing of the Offering in lieu of future royalty payments to the Crandell
Group. Subsequent to the closing of the Offering, no further charges to
earnings will be incurred related to these items. See Note 3 of Notes to
Financial Statements.
13
<PAGE>
NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE. Prior to the Offering, there was no public market
for the Common Stock, and there can be no assurance that an active trading
market will develop or be sustained upon completion of the Offering. The
initial public offering price will be determined by negotiation between the
Company and the representatives of the Underwriters based on a number of
factors, including market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
initial public offering price may not be indicative of the market price of the
Common Stock following completion of the Offering. The trading price of the
Common Stock could also be subject to significant fluctuations in response to
variations in quarterly results of operations, announcements of new products
by the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, overall market conditions
and other factors. In addition, the stock market historically has experienced
extreme price and volume fluctuations, which have particularly affected the
market price of securities of many high technology companies and which at
times have been unrelated or disproportionate to the operating performance of
such companies. These market fluctuations may adversely affect the market
price of the Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Upon completion of the
Offering, the Company will have 10,693,470 shares of Common Stock outstanding
(11,218,470 shares if the Underwriters' over-allotment option is exercised in
full), 3,500,000 (4,025,000 if the Underwriters' over-allotment option is
exercised in full) of which will be freely tradeable without restriction or
the requirement of future registration under the Securities Act of 1933, as
amended (the "Securities Act"). All of the remaining 7,193,470 shares of
Common Stock are "restricted securities" as that term is defined by Rule 144
promulgated under the Securities Act. Of such shares, no shares will be
eligible for sale in the public market immediately following commencement of
the Offering and 7,130,517 shares will become eligible for sale 90 days
following commencement of the Offering. All of the Company's officers and
directors and certain stockholders, including the Selling Stockholders, owning
upon completion of the Offering, in the aggregate, 7,018,708 shares of Common
Stock, have executed agreements pursuant to which each has agreed that they
will not, for a period of 180 days from the date of this Prospectus, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital
stock of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock, or other capital stock of the
Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters. In addition, certain other
stockholders of the Company holding an aggregate of 110,000 shares are subject
to 90 day lock-up agreements with the Company and stockholders holding an
aggregate of 63,762 shares are subject to 180 day lock-up agreements with the
Company. Further, holders of outstanding warrants and vested stock options
for, in the aggregate, an additional 1,319,573 shares of Common Stock are
subject to 180 day lock-up agreements with the Company and/or Prudential
Securities Incorporated. The Company has agreed that it will not, for a period
of 180 days from the date of this Prospectus, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the
Company or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock, or other capital stock of the Company without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except that such agreement does not prevent the Company from
granting additional options under the Company's 1995 Stock Plan (the "1995
Plan") or the 1997 Director Stock Option Plan (the "Director Plan") or from
issuing shares under the 1997 Employee Stock Purchase Plan (the "Purchase
Plan"). Upon the expiration of or release from such lock-up agreements,
7,130,517 shares will be eligible for immediate sale under Rule 144 or Rule
701 and 1,319,573 additional shares subject to outstanding warrants and vested
stock options could also be sold, subject in some cases to compliance with
certain volume limitations. The remaining 62,953 shares held by existing
stockholders will become eligible for sale at various times over a period of
less than one year. Prudential Securities Incorporated may, in its sole
discretion and at any time without notice, release all or
14
<PAGE>
any portion of the securities subject to lock-up agreements. Sales of such
shares in the future could adversely affect the prevailing market price of the
Common Stock. No prediction can be made as to the effect, if any, that future
sales of shares or the availability of shares for sale will have on the market
price for Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception of the
availability of shares for sale, could adversely affect the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. Beginning in November 1997,
the holders of an aggregate of 7,367,549 shares of Common Stock of the Company
which are "restricted securities" (including shares purchasable upon exercise
of outstanding warrants) (the "Registrable Securities") will be entitled to
certain rights with respect to registration of such shares. If exercised, such
registration rights could result in the Registrable Securities being sold
earlier than otherwise allowable under Rule 144, and could adversely affect
the prevailing market price of the Common Stock. See "Description of Capital
Stock--Registration Rights of Certain Holders" and "Shares Eligible for Future
Sale."
CONTROL BY EXISTING STOCKHOLDERS. Upon completion of the Offering, the
current officers, directors and their affiliates and five percent stockholders
will beneficially own approximately 42.3% of the outstanding shares of the
Common Stock of the Company (40.4% if the Underwriters' over-allotment option
is exercised in full). Accordingly, such persons, if they act together, likely
will have effective control over the Company through their ability to control
the election of directors and all other matters that require action by the
Company's stockholders, irrespective of how other stockholders may vote. Such
persons could prevent or delay a change in control of the Company, which may
be favored by a majority of the remaining stockholders. The ability to prevent
or delay a change in control of the Company also may have an adverse effect on
the market price of the Common Stock. See "Management--Executive Officers and
Directors," "Principal and Selling Stockholders" and "Description of Capital
Stock."
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS. The current stockholders
of the Company will receive certain benefits as a result of the Offering. The
Offering is expected to result in the creation of a public market for the sale
of shares held by the Company's stockholders. In addition, assuming an initial
public offering price of $9.00 per share, the Selling Stockholders will
receive, in the aggregate, net proceeds (after deducting underwriting
discounts and commissions) of $6.3 million from the sale of their shares in
the Offering. Each of the Selling Stockholders will realize a gain for each
share sold by such Selling Stockholder in the Offering equal to the difference
between $8.37 (which is the assumed initial public offering price per share,
net of underwriting discounts and commissions) and the acquisition cost of
such Selling Stockholder's shares (which purchase prices averaged
approximately $1.70 per share for all outstanding shares of Common Stock).
Each current stockholder of the Company will also receive an unrealized gain
for each share of Common Stock held by such stockholder upon completion of the
Offering equal to the price at which such share of Common Stock may be sold in
the public market less the acquisition cost of such share. The shares of
Common Stock held by the current stockholders upon completion of the Offering
(excluding shares subject to options outstanding under the Company's 1995 Plan
as of March 31, 1997 and shares issuable upon the exercise of outstanding
warrants as of March 31, 1997) will have an aggregate value of approximately
$64.7 million, assuming an initial public offering price of $9.00 per share,
which represents approximately $52.5 million in appreciation in the value of
such shares (based on an average price of $1.70 per share for all outstanding
shares of Common Stock). The shares of Common Stock which will be issued upon
the automatic net exercise in full of certain warrants held by certain
stockholders upon the closing of the Offering will have an aggregate value of
approximately $4.4 million, assuming an initial public offering price of $9.00
per share. Furthermore, of the net proceeds to be received by the Company from
the sale of the shares of Common Stock offered hereby, approximately $1.3
million will be used to pay the Company's obligations to the Crandell Group
and approximately $2.8 million will be used for payment to Ailicec
International Enterprises Ltd. in redemption of all outstanding shares of
Series P Redeemable Preferred Stock and accrued dividends thereon. See "Use of
Proceeds" and "Dilution."
EFFECT OF ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws") and
certain provisions of Delaware law could have the effect of making
15
<PAGE>
it more difficult for a third party to acquire, or of discouraging a third
party from attempting to acquire, control of the Company. Such provisions
could limit the price that investors might be willing to pay in the future for
the Company's Common Stock. These provisions permit the issuance of "blank
check" preferred stock by the Board of Directors without stockholder approval,
require super-majority approval to amend certain provisions in the Charter and
Bylaws, require that all stockholder actions be taken at duly called annual or
special meetings and not by written consent and impose various procedural and
other requirements that could make it more difficult for stockholders to
effect certain corporate actions. Furthermore, the Company will be subject to
the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person first becomes an
"interested stockholder," unless the business combination is approved in a
prescribed manner. Such application of Section 203 could also have the effect
of delaying or preventing a change of control of the Company. See "Description
of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in the
Offering will experience immediate and substantial dilution in the net
tangible book value of the Common Stock from the assumed initial public
offering price. To the extent outstanding options and warrants to purchase
shares of the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTION ON PAYMENT OF
DIVIDENDS. The Company has never declared or paid cash dividends on its Common
Stock and intends to retain all available funds for use in the operation and
expansion of its business. The Company therefore does not anticipate that any
cash dividends will be declared or paid in the foreseeable future. In
addition, the Company's credit facility prohibits the payment of cash
dividends without the consent of the lender.
16
<PAGE>
THE COMPANY
JetFax, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the
multifunction product ("MFP") market, which consists of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
The Company focuses on two distinct segments of the MFP market, the small
office/home office ("SOHO") segment and the corporate segment.
The Company's embedded system technology is made up of proprietary ASICs,
software and firmware that reside on a modular controller circuit board (an
"embedded system"). This technology provides the intelligence of a MFP and
coordinates, controls and optimizes a MFP's printing, faxing, copying and
scanning operations. JetFax licenses and manufactures its embedded system and
desktop software for a range of MFP solutions sold under the JetFax brand name
and the brand names of its OEM customers. The Company believes its embedded
systems technology and desktop software enable OEMs to offer more competitive
products with improved price/performance, shortened development cycles and
reduced development and product costs. The Company currently licenses its
embedded system technology or software to 25 licensees worldwide, including
Hewlett-Packard, Oki Data, Samsung, Xerox and Intel Corporation ("Intel").
Since its inception in 1988, the majority of the Company's revenues have
been generated from sales of JetFax branded products and consumables,
including the JetFax M5, the Company's current branded product. The Company
believes that it offers the most advanced and innovative MFP solutions
currently available in its product class. For example, the JetFax M5 was the
first MFP to support two telephone lines for simultaneous receiving and
sending of faxes, and the Company was one of the first to market a MFP with a
high speed 33.6 Kbps modem.
The Company believes its JetSuite software will define a new category of
all-in-one software for MFPs that will replace the piecemeal software
components historically bundled by MFP vendors. As a result, SOHO and
corporate workers can increase productivity and realize substantial time and
cost savings relative to traditional office protocols and equipment usage. The
Company's JetSuite desktop software can be sold on a stand-alone basis or
bundled with the JetFax embedded system to provide a complete, integrated
hardware and software solution. The Company plans to release JetSuite with
several OEM products in the third quarter of 1997. The Company also offers
JetPCL software, which provides high quality conversion of documents encoded
in Hewlett-Packard's Printer Control Language ("PCL"), the industry standard.
The Company's executive offices are located at 1376 Willow Road, Menlo Park,
California 94025, and its telephone number is (415) 324-0600. The Company was
incorporated in Delaware in August 1988.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered by the Company hereby are estimated to be $22,217,500
(approximately $26,611,750 if the Underwriters' over-allotment option is
exercised in full) assuming an initial public offering price of $9.00 per
share and after deducting the underwriting discount and commissions and
estimated offering expenses. The Company expects to use approximately
$2,764,000 of the net proceeds from the Offering for payment to the holders of
the Company's Series P Redeemable Preferred Stock in redemption thereof
pursuant to the terms of the Company's Certificate of Designation of Series P
Redeemable Preferred Stock. The Company expects to use approximately
$1,250,000 of the net proceeds received by it from the Offering for payment to
the Crandell Group in lieu of future royalty payments and for repayment of a
related note payable. The Company also intends to repay amounts outstanding
under its equipment term loan and line of credit facility ($1,244,000 at March
31, 1997) with a portion of the net proceeds of the Offering. The interest
rate on the line of credit is the bank's prime rate (8.5% as of March 31,
1997) plus 1.0% and the interest rate on the equipment term loan is the bank's
prime rate plus 1.5%. The Company intends to use the remaining net proceeds
for working capital and other general corporate purposes. Pending such uses,
the Company intends to invest the net proceeds from the Offering in short-
term, investment-grade, interest-bearing instruments. The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Certain Transactions," "Principal and Selling Stockholders"
and Note 7 of Notes to Financial Statements.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
Common Stock and does not expect to declare or pay cash dividends on its
Common Stock in the foreseeable future. The Company intends to retain any
earnings for future growth. In addition, the Company's credit facility
prohibits the payment of cash dividends without the consent of the lender. See
Note 7 of Notes to Financial Statements.
18
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997: (i) the actual
capitalization of the Company, (ii) the unaudited pro forma capitalization of
the Company reflecting the conversion of all outstanding preferred stock,
except the Series P Redeemable Preferred Stock, into 6,293,978 shares of
Common Stock; the issuance of 491,317 shares of Common Stock upon the
automatic net exercise in full of certain warrants at $2.15 per share and the
issuance of 144,623 shares of Common Stock upon the conversion of
approximately $970,000 of cumulative unpaid dividends on the Series F
Convertible Preferred Stock at a conversion price equal to 75% of the assumed
initial public offering price; and (iii) the unaudited pro forma
capitalization of the Company as adjusted to give effect to the sale of the
2,750,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $9.00 per share, after deducting the
underwriting discount and commissions and estimated offering expenses, the
application of the estimated net proceeds therefrom including the redemption
of all outstanding shares of Series P Redeemable Preferred Stock, as set forth
under the caption "Use of Proceeds" and the increase in the authorized number
of shares of Common Stock to 35,000,000 and the decrease in the authorized
number of shares of Preferred Stock to 5,000,000.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable (1)............................. $ 181 $ 181 $ --
-------- -------- --------
Redeemable preferred stock, $0.01 par value,
500,000 shares authorized, actual, pro forma
and as adjusted; 344,350 shares outstanding,
actual and pro forma; none outstanding, as
adjusted.................................... 2,764 2,764 --
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value, 9,000,000
shares authorized, actual and pro forma;
5,000,000 shares, as adjusted; 6,293,978
shares outstanding, actual; no shares
outstanding, pro forma and as adjusted..... 63 -- --
Common stock, $0.01 par value, 13,500,000
shares authorized, actual and pro forma;
35,000,000 shares, as adjusted; 1,013,552
shares outstanding, actual; 7,943,470
shares outstanding, pro forma; 10,693,470
shares outstanding, as adjusted (2)........ 10 79 107
Additional paid-in capital.................. 14,670 14,664 36,854
Accumulated deficit......................... (14,642) (14,642) (15,642)
-------- -------- --------
Total stockholders' equity................... 101 101 21,319
-------- -------- --------
Total capitalization..................... $ 3,046 $ 3,046 $ 21,319
======== ======== ========
</TABLE>
- --------
(1) See Note 7 of Notes to Financial Statements.
(2) Excludes (i) 1,160,635 shares of Common Stock issuable upon exercise of
stock options outstanding at March 31, 1997 under the Company's stock
option plans with a weighted average exercise price of $1.22 per share,
(ii) 401,999 shares of Common Stock issuable upon exercise of options
granted outside of the Company's stock option plans with an exercise price
of $1.72 per share, (iii) 388,500 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $2.75 per share and (iv) 100,000 shares of Common Stock issuable upon
exercise of warrants outstanding at March 31, 1997 with an exercise price
of $1.75 per share. See "Management--Incentive Stock Plans," "Certain
Transactions" and Note 10 of Notes to Financial Statements.
19
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the pro forma net tangible book value of the Common
Stock from the assumed initial public offering price. The pro forma net
tangible book value of the Company as of March 31, 1997 was $(361,000) or
$(0.05) per share. Pro forma net tangible book value per share is determined
by dividing the net tangible book value of the Company (tangible assets less
liabilities) by the pro forma number of shares of the Company's Common Stock
outstanding as of March 31, 1997. Without taking into account any changes in
net tangible book value subsequent to March 31, 1997, other than to give
effect to the receipt of the net proceeds of the sale of the 2,750,000 shares
of Common Stock offered by the Company hereby at an assumed initial public
offering price of $9.00 per share, after deducting the underwriting discount
and commissions and estimated offering expenses, and the application of the
net proceeds therefrom, the pro forma net tangible book value of the Common
Stock as of March 31, 1997 would have been $20,857,000, or $1.95 per share.
This represents an immediate dilution in pro forma net tangible book value of
$7.05 per share to new investors purchasing shares in the Offering. The
following table illustrates the per share dilution as of March 31, 1997:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $9.00
Pro forma net tangible book value at March 31, 1997.......... $(0.05)
Increase per share attributable to new investors............. 2.00
------
Pro forma net tangible book value after the Offering........... 1.95
-----
Dilution per share to new investors............................ $7.05
=====
</TABLE>
The following table sets forth, on an as adjusted basis as of March 31,
1997, after giving effect to the conversion of all outstanding Preferred Stock
into Common Stock, except the Series P Redeemable Preferred Stock, the
differences between existing stockholders and purchasers of Common Stock in
the Offering at an assumed initial public offering price of $9.00 per share
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 7,943,470 74.3% $ 13,519,652 35.3% $ 1.70
New investors (1)....... 2,750,000 25.7 24,750,000 64.7 9.00
---------- ----- ------------ -----
Total................. 10,693,470 100.0% $ 38,269,652 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in the Offering will reduce the number
of shares held by existing stockholders to 7,193,470 or approximately
67.3% of the total number of shares of Common Stock to be outstanding
after the Offering, and will increase the number of shares held by new
investors to 3,500,000, or approximately 32.7% of the total number of
shares of Common Stock to be outstanding after the Offering. If the
Underwriters' over-allotment option is exercised in full, the number of
shares held by new investors will increase to 4,025,000 shares, or
approximately 35.9% of the total number of shares to be outstanding after
the Offering. See "Principal and Selling Stockholders."
The foregoing tables assume no exercise of the Underwriters' over-allotment
option or stock options or warrants outstanding at March 31, 1997. At March
31, 1997, there were (i) 1,160,635 shares of Common Stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$1.22 per share, (ii) 401,999 shares of Common Stock issuable upon exercise of
options granted outside of the Company's stock option plans with an exercise
price of $1.72 per share, (iii) 388,500 shares of Common Stock issuable upon
exercise of outstanding warrants with an exercise price of $2.75 per share and
(iv) 100,000 shares of Common Stock issuable upon exercise of outstanding
warrants with an exercise price of $1.75 per share. To the extent that
outstanding options and warrants are exercised in the future, there will be
further dilution to new investors. See "Management--Incentive Stock Plans,"
"Certain Transactions" and Note 10 of Notes to Financial Statements.
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the fiscal years ended
March 31, 1995 and 1996, and the nine months ended December 31, 1996, and the
balance sheet data at March 31, 1996 and December 31, 1996 are derived from
the financial statements of the Company included elsewhere in this Prospectus,
which have been audited by Deloitte & Touche LLP, independent auditors. The
statement of operations data for the fiscal years ended March 31, 1993 and
1994, and the balance sheet data at March 31, 1993, 1994 and 1995, are derived
from audited financial statements not included herein. The selected financial
data for the nine months ended December 31, 1995 and for the quarters ended
March 31, 1996 and 1997, and the balance sheet data at March 31, 1997, have
been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements and which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's results of
operations. The following financial data is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED QUARTER ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31, MARCH 31,
--------------------------------------- ------------------ ----------------
1993 1994 1995 1996 1995 1996 (1) 1996 1997 (1)
--------- -------- -------- -------- -------- -------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product............... $ 4,542 $ 6,086 $ 6,413 $ 11,143 $ 7,336 $ 10,205 $3,807 $4,250
Development fees ..... -- 75 1,200 699 466 1,416 233 743
Software and
technology license
fees................. -- -- 139 1,345 667 1,241 678 223
--------- -------- -------- -------- -------- -------- ------ ------
Total revenues ...... 4,542 6,161 7,752 13,187 8,469 12,862 4,718 5,216
Costs and expenses:
Cost of product
revenues ............ 3,695 5,486 5,249 11,102 7,793 8,495 3,309 2,979
Research and
development ......... 1,397 1,311 1,118 1,249 919 1,709 330 1,477(2)
Selling and marketing
..................... 633 1,303 1,325 2,710 1,745 2,785 965 972
General and
administrative ...... 1,019 615 746 750 500 823 250 352
--------- -------- -------- -------- -------- -------- ------ ------
Total costs and
expenses ........... 6,744 8,715 8,438 15,811 10,957 13,812 4,854 5,780
--------- -------- -------- -------- -------- -------- ------ ------
Loss from operations .. (2,202) (2,554) (686) (2,624) (2,488) (950) (136) (564)
Interest and other
income (expense)...... (18) (5) (68) (270) (192) 13 (78) (27)
--------- -------- -------- -------- -------- -------- ------ ------
Loss before
extraordinary item and
income taxes ......... (2,220) (2,559) (754) (2,894) (2,680) (937) (214) (591)
Provision for income
taxes ................ -- -- -- 35 35 105 -- 45
--------- -------- -------- -------- -------- -------- ------ ------
Loss before
extraordinary item ... (2,220) (2,559) (754) (2,929) (2,715) (1,042) (214) (636)
Extraordinary item (3). -- -- 349 -- -- -- -- --
--------- -------- -------- -------- -------- -------- ------ ------
Net loss............... $ (2,220) $ (2,559) $ (405) $ (2,929) $ (2,715) $ (1,042) $ (214) $ (636)
========= ======== ======== ======== ======== ======== ====== ======
PRO FORMA DATA (4):
Net loss per share..... $ (0.14) $(0.08)
======== ======
Common and common
equivalent shares used
in computing net loss
per share............. 8,454 8,474
======== ======
<CAPTION>
DECEMBER 31, MARCH 31,
MARCH 31, 1996 1997
--------------------------------------- ------------ ---------
1993 1994 1995 1996
--------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ (2,138) $ (4,636) $ (2,097) $ 3,780 $1,962 $1,564
Total assets........... 2,939 2,527 3,434 9,619 6,121 8,020
Long-term note payable,
less current portion.. 4 4 2,372 -- 198 181
Redeemable preferred
stock................. -- -- -- 2,610 2,726 2,764
Total stockholders'
equity (deficiency)... (1,899) (4,458) (4,185) 1,369 219 101
</TABLE>
- --------
(1) Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. The 40-week period from April 1, 1996 to January 4,
1997 is referred to herein as the nine months ended December 31, 1996. For
presentation purposes, the Company refers to its reporting year ended
January 4, 1997 as ending on December 31, 1996 and the 13-week period from
January 5, 1997 to April 5, 1997 is referred to herein as the quarter
ended March 31, 1997.
(2) Includes $551,000 of expenses related to the Crandell Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(3) Represents a gain on exchange of stockholder debt and receivables for
notes payable. See Note 2 of Notes to Financial Statements.
(4) For an explanation of the determination of the number of shares used in
computing pro forma net loss per share, see Note 1 of Notes to Financial
Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussions in this Prospectus contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the section entitled "Risk Factors"
as well as those discussed elsewhere in this Prospectus.
OVERVIEW
JetFax, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the MFP
market, which consists of electronic office devices that combine print, fax,
copy and scan capabilities in a single unit. The Company was incorporated in
August 1988 and since that time has engaged in the development, manufacture
and sale of its branded MFPs, including the 8000-D, the JetFax 4 and the
JetFax M5, and has entered into agreements with a number of OEMs for the
customization and integration of the Company's embedded system technology and
desktop software in OEMs' MFPs. In July 1996, the Company purchased
substantially all of the assets of the Crandell Group. At the time of the
acquisition, the Crandell Group's products included desktop software for
document conversion and portable document handling and products in development
included a fully integrated Microsoft Windows desktop application for MFPs.
The Company has continued to develop this software, under the JetSuite name,
and plans to release JetSuite with several OEM products in the third quarter
of 1997.
Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
following December 31. The 40-week period from April 1, 1996 to January 4,
1997 is referred to herein as the nine months ended December 31, 1996 and the
13-week period from January 5, 1997 to April 5, 1997 is referred to herein as
the quarter ended March 31, 1997. For presentation purposes, the Company
refers to its reporting year ended January 4, 1997 as ending on December 31,
1996. The most recent fiscal year discussion and analysis is based on the nine
months ended December 31, 1996 compared to the nine months ended December 31,
1995.
Revenues increased from $4.5 million for the fiscal year ended March 31,
1993 to $13.2 million for the fiscal year ended March 31, 1996. Revenues were
$12.9 million for the nine months ended December 31, 1996 and $5.2 million for
the quarter ended March 31, 1997. At March 31, 1997, the Company had an
accumulated deficit of $14.6 million and total stockholders' equity of
$101,000.
The Company's revenues are derived from three sources: (i) product revenues
consisting of sales of JetFax branded MFPs, consumables and upgrades; (ii)
development fees for engineering services; and (iii) software and technology
license fees related to both its embedded system technology for MFPs and its
desktop software. Historically, product revenues have accounted for the
majority of the Company's total revenues. For the nine months ended December
31, 1996, product revenues, development fees and software and technology
license fees, as a percentage of total revenues, were 79%, 11% and 10%,
respectively. For the quarter ended March 31, 1997, product revenues,
development fees and software and technology fees, as a percentage of total
revenues, were 82%, 14% and 4%, respectively. For the nine months ended
December 31, 1996, revenues generated from the desktop software business
acquired from the Crandell Group in July 1996 included $628,000 of software
license fees and $388,000 of development fees.
Product revenues result from the sale of the Company's branded MFP products
into the corporate market through business equipment dealers. Product revenues
are generally recognized when the product is shipped to the customer.
Development fee revenues are derived from customizing the Company's embedded
system technology and software for inclusion in specific applications for its
OEMs' products. Development fee revenues are recognized on the percentage of
completion method over the development period. See Note 1 of Notes to
Financial Statements.
22
<PAGE>
The Company's development contracts with certain OEM customers have enabled
JetFax to accelerate its product development efforts. The Company classifies
all development costs related to such contracts as research and development
expenses because such development fees have only partially funded the
Company's product development activities, and the Company generally retains
ownership of the technology developed under these agreements.
Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. These payments can take the form of one-time
license fees, non-refundable prepaid royalties or recurring per unit
royalties. One-time license fees and non-refundable prepaid royalties are
recognized upon the later of delivery of the contracted technology or
satisfaction of contractual milestones, if any. Recurring license revenues
from per unit fees paid by the Company's OEMs are recognized upon the
manufacture or shipment of products incorporating the Company's technology as
specified in the related agreements. The recurring license revenues reported
by the Company are dependent on the timing and accuracy of product
manufacturing or sales reports received from the Company's OEM customers.
These reports are provided on a quarterly basis which may not coincide with
the Company's quarter end. However, the Company attempts to get verbal
estimates more frequently. The quarterly reports, as well as any verbal
estimates, are subject to delay and potential revision by the OEM. Therefore,
the Company may be unable to estimate such revenues accurately prior to public
announcement of the Company's quarterly results. In such an event, the Company
may subsequently be required to revise its previously reported revenues when
it publishes its financial statements or adjust revenues for subsequent
periods, which could have a material adverse effect on the Company's business,
financial condition and results of operations and the price of the Company's
Common Stock.
A substantial portion of the Company's branded products sales is to dealers
in the IKON network. These IKON dealers accounted for 21% and 30% of the
Company's total revenues for the nine months ended December 31, 1996 and the
quarter ended March 31, 1997, respectively. The Company's OEM customers for
engineering development and technology licenses are Hewlett-Packard, Oki Data,
Samsung, Xerox and Intel Corporation. The royalty payments owed the Company by
Xerox under the existing technology agreements were largely completed during
the nine months ended December 31, 1996. The Company expects that the ongoing
obligations under existing OEM contracts will generate future royalty
payments. The termination of a major dealer relationship or an OEM agreement
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on Dealers
and Distributors" and "--Dependence on OEMs."
International revenues accounted for 22%, 39%, 26% and 24% of total revenues
for the fiscal years ended March 31, 1995 and March 31, 1996, the nine months
ended December 31, 1996 and the quarter ended March 31, 1997, respectively.
The increase from the fiscal year ended March 31, 1995 to the fiscal year
ended March 31, 1996 was primarily due to higher sales of the JetFax 4 in
Europe. The decrease from the fiscal year ended March 31, 1996 to the nine
months ended December 31, 1996 was primarily due to higher than normal
inventory levels of the JetFax M5 in Germany at the prior fiscal year end. All
of the development fees and software and technology license revenues, and most
of the product revenues, have been denominated and collected in United States
dollars. The Company has not hedged the foreign currency exposure related to
product sales denominated in foreign currencies as the impact has not been
significant. See "Risk Factors--International Activities."
The gross margins for the Company's branded MFP products have been and are
expected to continue to be constrained by the competitive nature of the
marketplace, pricing pressures and the greater name recognition of the larger
companies with which JetFax competes. The Company believes that sales of its
branded MFP products provide a substantial revenue base, an opportunity to
stay in close touch with evolving customer and market needs and a high level
of credibility in demonstrating the Company's advanced technology. The margins
on consumables, such as toner cartridges and drums, and on upgrades, such as
the two-line upgrade, are typically higher than on the base unit. In addition,
the Company's consumables generate recurring revenues which tend to increase
as the cumulative number of units sold increases.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
items in the Company's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED QUARTER ENDED
MARCH 31, DECEMBER 31, MARCH 31,
------------------- ------------------- ---------------
1995 1996 1995 1996 1996 1997
-------- -------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... 82.7% 84.5% 86.6% 79.3% 80.7% 81.5%
Development fees...... 15.5 5.3 5.5 11.0 4.9 14.2
Software and
technology license
fees................. 1.8 10.2 7.9 9.7 14.4 4.3
-------- -------- -------- -------- ------ ------
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product
revenues............. 67.7 84.2 92.0 66.0 70.1 57.1
Research and
development.......... 14.4 9.5 10.9 13.3 7.0 28.3(1)
Selling and marketing. 17.1 20.6 20.6 21.7 20.5 18.6
General and
administrative....... 9.6 5.7 5.9 6.4 5.2 6.8
-------- -------- -------- -------- ------ ------
Total costs and
expenses........... 108.8 119.9 129.4 107.4 102.8 110.8
-------- -------- -------- -------- ------ ------
Loss from operations.... (8.8) (19.9) (29.4) (7.4) (2.8) (10.8)
Interest and other
income (expense)....... (0.9) (2.0) (2.3) 0.1 (1.7) (0.5)
-------- -------- -------- -------- ------ ------
Loss before
extraordinary item and
income taxes............ (9.7) (21.9) (31.7) (7.3) (4.5) (11.3)
Provision for income
taxes................... -- 0.3 0.4 0.8 -- 0.9
-------- -------- -------- -------- ------ ------
Loss before
extraordinary item...... (9.7) (22.2) (32.1) (8.1) (4.5) (12.2)
Extraordinary item...... 4.5 -- -- -- -- --
-------- -------- -------- -------- ------ ------
Net loss................ (5.2)% (22.2)% (32.1)% (8.1)% (4.5)% (12.2)%
======== ======== ======== ======== ====== ======
</TABLE>
- --------
(1) Includes $551,000 of expenses (representing 10.6% of total revenues)
related to the Crandell Acquisition.
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Revenues. Total revenues increased 11% from $4.7 million for the quarter
ended March 31, 1996 to $5.2 million for the quarter ended March 31, 1997.
Product revenues increased 12% from $3.8 million for the quarter ended March
31, 1996 to $4.3 million for the quarter ended March 31, 1997, reflecting
primarily increased domestic unit shipments of the JetFax M5 and related
consumables and upgrades, which more than offset the lower average selling
price of the JetFax M5 during the quarter ended March 31, 1997. Development
fees increased 219% from $233,000 for the quarter ended March 31, 1996 to
$743,000 for the quarter ended March 31, 1997 due to significant new OEM
programs undertaken in the last twelve months. Through March 31, 1997, the
Company recognized cumulative revenues of $316,000 pursuant to a development
agreement with one of its OEMs, of which approximately $96,000 was recognized
during the quarter ended March 31, 1997. The Company has experienced delays in
completion of the development project for this OEM. Pursuant to certain
provisions of the development agreement, the final milestone payment may be
reduced; however, the Company believes that a reduction, if any, in this
payment would not have a material adverse effect on the Company's results of
operations or cash flows. Software and technology licensing fees decreased 67%
from $678,000 in the quarter ended March 31, 1996 to $223,000 in the quarter
ended March 31, 1997, as the royalties from Xerox declined due to the end of
life of Xerox products for which JetFax earned royalties. International
revenues decreased from 33% of total revenues for the quarter ended March 31,
1996 to 24% for the quarter ended March 31, 1997 as a result of lower
international product shipments primarily in Europe, a reduction in German
distribution inventory levels and the transition from a local German
distributor to a new Company sales office in Germany.
Cost of Product Revenues. Cost of product revenues decreased 10% from $3.3
million for the quarter ended March 31, 1996 to $3.0 million for the quarter
ended March 31, 1997. The product gross margin increased
24
<PAGE>
from 13.1% for the quarter ended March 31, 1996 to 29.9% for the quarter ended
March 31, 1997. Product margins improved on the Company's main product, the
JetFax M5, due to the higher production levels and cost reduction efforts
implemented over the past year. Additionally, the higher margin JetFax M5 and
related consumables and upgrades accounted for a higher percentage of the
overall product mix than a year ago.
Research and Development. Research and development expenses increased from
$330,000 for the quarter ended March 31, 1996 to $1.5 million for the quarter
ended March 31, 1997. The quarter ended March 31, 1997 included an accounting
charge for a variable equity award of $525,000 classified as compensation,
which was related to warrants issued as part of the Crandell Acquisition and
$26,000 of compensation expenses associated with the continuing employment of
the founders of the Crandell Group. These compensation expenses are based on a
percentage of ongoing desktop software sales and will be paid in full and will
terminate upon the closing of the Offering. See Note 3 of Notes to Financial
Statements. Excluding these expenses, research and development expenses were
$926,000, or 17.8% of total revenues, for the quarter ended March 31, 1997, an
increase of 188% from the quarter ended March 31, 1996. This increase resulted
primarily from: (i) the software development personnel added with the Crandell
Acquisition in July 1996; (ii) quick turnaround engineering prototype expenses
for the development of an embedded system; and (iii) expenses related to
hiring additional engineering personnel.
Selling and Marketing. Selling and marketing expenses were essentially flat,
increasing from $965,000 for the quarter ended March 31, 1996 to $972,000 for
the quarter ended March 31, 1997. As a percentage of total revenues, selling
and marketing expenses declined from 20.5% for the quarter ended March 31,
1996 to 18.6% for the quarter ended March 31, 1997.
General and Administrative. General and administrative expenses increased
41% from $250,000, or 5.2% of total revenues, for the quarter ended March 31,
1996 to $352,000, or 6.8% of total revenues, for the quarter ended March 31,
1997. The increase was primarily due to higher personnel, consulting and
hiring expenses.
Interest and Other Income (Expense). Interest and other income (expense)
decreased from $78,000 for the quarter ended March 31, 1996 to $27,000 for the
quarter ended March 31, 1997. The decrease was primarily due to lower interest
expense resulting from the lower level of debt outstanding.
Provision for Income Taxes. Due to the Company's net losses, there was no
provision for federal or state income taxes for the quarters ended March 31,
1996 and March 31, 1997. The $45,000 income tax provision for the quarter
ended March 31, 1997 was related to foreign withholding taxes on certain
development fees.
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995
Revenues. Total revenues increased 52% from $8.5 million for the nine months
ended December 31, 1995 to $12.9 million for the nine months ended December
31, 1996. Product revenues increased 39% from $7.3 million for the nine months
ended December 31, 1995 to $10.2 million for the nine months ended
December 31, 1996, reflecting primarily increased unit shipments and higher
average selling prices of the Company's MFPs as the Company transitioned from
the JetFax 4, an inkjet MFP, to the JetFax M5, a high performance, laser/LED
MFP, which began commercial shipment in June 1995. In addition, during the
nine months ended December 31, 1996, the Company expanded the number of large
business equipment dealers marketing the Company's products. Development fees
increased 203% from $466,000 for the nine months ended December 31, 1995 to
$1.4 million for the nine months ended December 31, 1996 as major programs
were initiated or continued for OEMs. Software and technology license fees
increased 86% from $667,000 for the nine months ended December 31, 1995 to
$1.2 million for the nine months ended December 31, 1996. This increase was
primarily due to the Crandell Acquisition in July 1996 which added software
license fees of $628,000 for the last two quarters of the nine months ended
December 31, 1996, but the increase was partially offset by a decline in
royalties from Xerox due to the end of life of a related Xerox product.
Cost of Product Revenues. Cost of product revenues consists primarily of
purchased materials; direct production labor and supervision for assembly and
test; subcontracted manufacturing, mainly for printed circuit
25
<PAGE>
boards; indirect labor for inventory management, shipping and receiving,
purchasing, manufacturing engineering, document control and operations
management; and related facility and support costs. Cost of product revenues
may vary as a percentage of total revenues in the future as a result of a
number of factors including: relative production volumes; the mix of product
shipped and the varying proportion of MFPs versus consumables and upgrades;
changes in production yields, especially those associated with the
introduction of new products; risk of inventory obsolescence and excess
inventory; pricing pressures in the market; and vendor quality or supply
problems.
Cost of product revenues increased 9% from $7.8 million for the nine months
ended December 31, 1995 to $8.5 million for the nine months ended December 31,
1996, due to increased sales levels. The product gross margin increased from
negative 6.2% for the nine months ended December 31, 1995 to 16.8% for the
nine months ended December 31, 1996. The product gross margin for the nine
months ended December 31, 1995 was adversely affected by reserves of $760,000
taken in the quarter ended September 30, 1995 for the write down of certain
inventory to net realizable value and to record estimated losses on purchase
commitments related to the pricing decline on the JetFax 4. The Company had a
fixed price order from Xerox for JetFax 4 units, but the price at which the
units could be sold in the market had declined substantially due to
competition from other manufacturers' new product introductions. A settlement
of the purchase commitment from Xerox was negotiated in the quarter ended
September 30, 1996, which resulted in a reduction of the inventory reserve and
a credit to cost of product revenues of $280,000.
Excluding the impact of these reserves, the product gross margin was 4.1%
for the nine months ended December 31, 1995 as compared to 14.0% for the nine
months ended December 31, 1996. The lower product gross margin in the prior
nine month period primarily reflected the impact of competitive pricing
pressures in the inkjet MFP market and the startup and higher initial
production costs associated with the June 1995 commercial release of the
JetFax M5.
Research and Development. Research and development expenses were comprised
mainly of personnel related costs, engineering prototypes and supplies,
engineering contractors, computer equipment depreciation and facilities
expenses. Research and development expenses increased 86% from $919,000 for
the nine months ended December 31, 1995 to $1.7 million for the nine months
ended December 31, 1996. This increase resulted primarily from: (i) the
software development personnel added with the Crandell Acquisition in July
1996; (ii) certain compensation expenses associated with the continuing
employment of the founders of the Crandell Group, which are based on a
percentage of ongoing desktop software sales (these compensation expenses will
be paid in full and terminate upon the closing of the Offering); and (iii)
quick turnaround engineering prototype expenses for the development of an
embedded system. See "Certain Transactions."
Selling and Marketing. Selling and marketing expenses consisted primarily of
personnel related costs and commissions, travel and entertainment expenses of
direct sales and marketing personnel, advertising and promotional expenses,
marketing communications, customer support and service and facilities
expenses. Selling and marketing expenses increased 59% from $1.7 million for
the nine months ended December 31, 1995 to $2.8 million for the nine months
ended December 31, 1996. The increase was primarily related to higher
commissions resulting from higher sales levels and to continuing efforts to
increase the number of large dealers selling the Company's branded products in
the business equipment dealer marketing channel.
General and Administrative. General and administrative expenses included
personnel related costs for administrative, finance and executive personnel,
outside professional fees and facilities expenses. The expenses related to
general and administrative functions increased 65% from $500,000 for the nine
months ended December 31, 1995 to $823,000 for the nine months ended December
31, 1996. The increase was primarily due to higher personnel costs, legal and
consulting expenses and bank fees related to the establishment of a credit
facility.
Interest and Other Income (Expense). Interest and other income (expense)
consisted primarily of interest expense, a small amount of interest income and
miscellaneous items of other income and expense. Interest and other income
(expense) was a net expense of $192,000 for the nine months ended December 31,
1995 and net income of $13,000 for the nine months ended December 31, 1996.
During the nine months ended December 31, 1995, the
26
<PAGE>
Company incurred interest expense on approximately $3.0 million of the
Company's 10% senior subordinated secured convertible notes outstanding on
December 31, 1995. These notes were repaid or converted into shares of
preferred stock in March 1996. In addition, the investment proceeds from the
sale of Convertible Preferred Stock in March 1996 resulted in net interest
income of $22,000 for the nine months ended December 31, 1996.
Provision for Income Taxes. Due to the Company's net losses, there was no
provision for federal or state income taxes for the nine months ended December
31, 1995 or the nine months ended December 31, 1996. The $35,000 income tax
provision for the nine months ended December 31, 1995 and the $105,000 income
tax provision for the nine months ended December 31, 1996 were related to
foreign withholding taxes on certain development fees.
At December 31, 1996, net operating loss carryforwards of approximately
$11.1 million and $6.3 million were available to offset future federal and
state taxable income, respectively, and research and development tax credits
of $108,000 and $156,000 were available to offset future federal and state
income taxes, respectively. The operating loss and credit carryforwards will
expire, if not utilized, at various dates beginning in 2003 through 2011.
Utilization of the net operating loss and credit carryforwards may be subject
to significant limitations as a result of certain ownership changes. See Note
11 of Notes to Financial Statements.
The Company recognizes deferred tax assets and liabilities based on the
difference between financial reporting and tax bases of assets and liabilities
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Based on the weight of available
evidence, which includes the Company's historical losses since inception, and
the uncertainties regarding future results of operations, the Company has
provided a full valuation allowance against its net deferred tax assets of
$4.9 million at December 31, 1996, as it is more likely than not that the
deferred tax assets will not be realized. See Note 11 of Notes to Financial
Statements.
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995
Revenues. Total revenues increased 70% from $7.8 million for the fiscal year
ended March 31, 1995 to $13.2 million for the fiscal year ended March 31,
1996. This increase resulted primarily from the June 1995 commercial release
of the JetFax M5 and, to a lesser extent, increased sales of consumables and
upgrades. Product revenues increased 74% from $6.4 million for the fiscal year
ended March 31, 1995 to $11.1 million for the fiscal year ended March 31,
1996. Development fees decreased 42% from $1.2 million for the fiscal year
ended March 31, 1995 to $699,000 for the fiscal year ended March 31, 1996, due
to the completion of a major development project for Xerox. Correspondingly,
software and technology license fees increased from $139,000 for the fiscal
year ended March 31, 1995 to $1.3 million for the fiscal year ended March 31,
1996, reflecting receipt of royalties on the Xerox products that had begun
production.
Cost of Product Revenues. Cost of product revenues increased 111% from $5.2
million for the fiscal year ended March 31, 1995 to $11.1 million for the
fiscal year ended March 31, 1996. The decline in product gross margin was
primarily due to reserves of $760,000 taken in the quarter ended September 30,
1995 for the write-down of certain inventories to net realizable value and to
record losses on purchase commitments due to the pricing decline on the JetFax
4. Excluding the impact of these reserves, the product gross margin was 18.2%
for the fiscal year ended March 31, 1995 as compared to 7.2% for the fiscal
year ended March 31, 1996. The lower product gross margin primarily reflected
the impact of the competitive pricing pressures in the inkjet MFP market and
the startup and higher initial production costs associated with the June 1995
commercial release of the JetFax M5. For the quarter ended March 31, 1996, the
product gross margin had increased to 13.1%.
Research and Development. Research and development expenses increased from
$1.1 million for the fiscal year ended March 31, 1995 to $1.2 million for the
fiscal year ended March 31, 1996, but declined as a percentage of total
revenues from 14.4% to 9.5%, respectively, primarily due to the increase in
total revenues. The major technical development effort for Xerox and the
internal development of the second generation embedded system used in the
Company's JetFax M5 were largely completed during the fiscal year ended March
31, 1995, leading
27
<PAGE>
to a relatively minor increase in research and development expenses for the
fiscal year ended March 31, 1996 as personnel were deployed to other
development programs.
Selling and Marketing. Selling and marketing expenses increased 105% from
$1.3 million for the fiscal year ended March 31, 1995 to $2.7 million for the
fiscal year ended March 31, 1996. The higher expenses for marketing and sales
personnel, commissions, product communication materials, dealer incentives and
cooperative advertising shared with the dealers were related to the commercial
release of the JetFax M5 and building the Company's network of business
equipment dealers.
General and Administrative. General and administrative expenses were
approximately $750,000 for both the fiscal years ended March 31, 1995 and
March 31, 1996, but declined as a percentage of total revenues from 9.6% for
the fiscal year ended March 31, 1995 to 5.7% for the fiscal year ended March
31, 1996.
Interest and Other Income (Expense). Interest expense increased from $68,000
for the fiscal year ended March 31, 1995 to $270,000 for the fiscal year ended
March 31, 1996. The increase in interest expense for the fiscal year ended
March 31, 1996 was related to the issuance of 10% senior secured convertible
notes throughout the year ended March 31, 1995 which totaled $2.0 million at
such year end. The highest balance owed under such notes was $3.0 million in
March 1996 when such notes were either repaid or converted into shares of
Convertible Preferred Stock.
Provision for Income Taxes. Due to the Company's net losses, there was no
provision for federal or state income taxes for the fiscal years ended March
31, 1995 or March 31, 1996. The $35,000 income tax provision for the fiscal
year ended March 31, 1996 was related to foreign withholding taxes.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly results may be subject to fluctuations resulting
from a variety of factors, including: the timing of introductions of new
products or product enhancements by the Company, its OEMs and their
competitors; initiation or termination of arrangements between the Company and
its existing and potential significant OEM customers or dealers and
distributors; the size and timing of and fluctuations in end user demand for
the Company's branded products and OEM products incorporating the Company's
technology; inventories of the Company's branded products or products
incorporating the Company's technology carried by the Company, its
distributors or dealers, its OEMs or the OEMs' distributors that exceed
current or projected end user demand; the phase-out or early termination of
the Company's branded products or OEM products incorporating the Company's
technology; the amount and timing of development agreements, one-time software
licensing transactions and recurring licensing fees; non-performance by the
Company, its suppliers or its OEM or other customers pursuant to their plans
and agreements; seasonal trends; competition and pricing; customer order
deferrals and cancellations in anticipation of new products or product
enhancements; industry and technology developments; changes in the Company's
operating expenses; software and hardware defects; product delays or product
quality problems; currency fluctuations; and general economic conditions. The
Company expects that its operating results will continue to fluctuate
significantly as a result of these and other factors. A substantial portion of
the Company's operating expenses is related to personnel, development of new
products, marketing programs and facilities. The level of spending for such
expenses cannot be adjusted quickly and is based, in significant part, on the
Company's expectations of future revenues and anticipated OEM commitments. If
such commitments do not generate revenues or operating expenses are
significantly higher, the Company's business, financial condition and results
of operations will be adversely affected, which could have a material adverse
effect on the price of the Company's Common Stock. As a result, the Company
does not believe that its operating results for any one quarter are
necessarily indicative of results for any future interim period. See "Risk
Factors--Potential Fluctuations in Quarterly Results."
The following quarterly information has been prepared on the same basis as
the Financial Statements and related Notes included elsewhere in this
Prospectus and in the opinion of the Company's management reflects all
adjustments, consisting only of normal, recurring adjustments, necessary for a
fair presentation in accordance with generally accepted accounting principles
for the periods presented.
28
<PAGE>
The following table presents the unaudited statements of operations for each
of the Company's last eight quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Product................ $1,691 $ 2,388 $ 3,257 $ 3,807 $ 3,290 $ 3,173 $ 3,742 $ 4,250
Development fees....... -- 233 233 233 217 380 819 743
Software and technology
license fees.......... 107 120 440 678 289 518 434 223
------ ------- ------- ------- ------- ------- ------- -------
Total revenues........ 1,798 2,741 3,930 4,718 3,796 4,071 4,995 5,216
Costs and expenses:
Cost of product
revenues.............. 1,635 3,152 3,006 3,309 2,948 2,549 2,998 2,979
Research and
development........... 347 272 300 330 349 662 698 1,477(1)
Selling and marketing.. 389 576 780 965 925 924 936 972
General and
administrative........ 142 131 227 250 182 293 348 352
------ ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............. 2,513 4,131 4,313 4,854 4,404 4,428 4,980 5,780
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (715) (1,390) (383) (136) (608) (357) 15 (564)
Interest and other
income (expense)....... (50) (67) (75) (78) 16 3 (6) (27)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item and
income taxes........... (765) (1,457) (458) (214) (592) (354) 9 (591)
Provision for income
taxes.................. 35 -- -- -- 1 63 41 45
------ ------- ------- ------- ------- ------- ------- -------
Net loss................ $ (800) $(1,457) $ (458) $ (214) $ (593) $ (417) $ (32) $ (636)
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes $551,000 of expenses related to the Crandell Acquisition.
The following table sets forth certain revenue and expense items as a
percentage of total revenues for each of the Company's last eight quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ 94.0% 87.1% 82.9% 80.7% 86.7% 77.9% 74.9% 81.5%
Development fees....... -- 8.5 5.9 4.9 5.7 9.3 16.4 14.2
Software and technology
license fees.......... 6.0 4.4 11.2 14.4 7.6 12.7 8.7 4.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product
revenues.............. 90.9 115.0 76.5 70.1 77.7 62.6 60.0 57.1
Research and
development........... 19.3 9.9 7.6 7.0 9.2 16.3 14.0 28.3(1)
Selling and marketing.. 21.6 21.0 19.9 20.5 24.4 22.7 18.7 18.6
General and
administrative........ 7.9 4.8 5.8 5.2 4.8 7.2 7.0 6.8
----- ----- ----- ----- ----- ----- ----- -----
Total costs and
expenses............. 139.8 150.7 109.8 102.8 116.0 108.8 99.7 110.8
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (39.8) (50.7) (9.8) (2.8) (16.0) (8.8) 0.3 (10.8)
Interest and other
income (expense)....... (2.8) (2.5) (1.9) (1.7) 0.4 0.1 (0.1) (0.5)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
extraordinary item and
income taxes........... (42.6) (53.2) (11.7) (4.5) (15.6) (8.7) 0.2 (11.3)
Provision for income
taxes.................. 1.9 -- -- -- -- 1.5 0.8 0.9
----- ----- ----- ----- ----- ----- ----- -----
Net loss................ (44.5)% (53.2)% (11.7)% (4.5)% (15.6)% (10.2)% (0.6)% (12.2)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------
(1) Includes 10.6% of total revenues from expenses related to the Crandell
Acquisition.
Product revenues increased each quarter during the fiscal year ended March
31, 1996, resulting mainly from the introduction of the JetFax M5 in the first
quarter and the steadily increasing unit shipments as the year progressed.
Product revenues decreased during the quarters ended March 31, 1996 and June
30, 1996, due
29
<PAGE>
primarily to the decline in unit shipments and sales price of the JetFax 4,
which had substantial pricing competition in the market; and to a lesser
extent to a decline in international unit shipments of the JetFax M5 and the
resulting lower overall JetFax M5 average selling price. Higher unit prices
are normally achieved in international markets. Product revenues increased in
the quarter ended December 31, 1996 from the prior two quarters, due mainly to
an increase in domestic JetFax M5 unit shipments resulting from increased
numbers of large dealers selling the Company's branded products in the
business equipment dealer marketing channel.
Development fees increased in the quarters ended September 30, 1996 and
December 31, 1996 due to initiation of major development programs for several
OEM customers.
Cost of product revenues increased in the quarter ended September 30, 1995.
The product gross margin was adversely affected by reserves of $760,000 taken
in the quarter ended September 30, 1995 for the write down of certain
inventory to net realizable value and to record estimated losses on purchase
commitments related to the pricing decline on the JetFax 4. The Company had a
fixed price order from Xerox for JetFax 4 units, but the price at which the
units could be sold in the market had declined substantially due to
competition from other manufacturers' new product introductions. A settlement
of the purchase commitment with Xerox was negotiated in the quarter ended
September 30, 1996, which resulted in a reduction of the inventory reserve and
a credit to cost of product revenues of $280,000.
Excluding the impact of these reserves, the product gross margin was
negative 0.2% for the quarter ended September 30, 1995 compared to 7.2% for
the fiscal year ended March 31, 1996. Excluding the impact of the $280,000
credit to cost of product revenues in the quarter ended September 30, 1996,
product gross margin improved from 10.4% for the quarter ended June 30, 1996,
to 10.8% for the quarter ended September 30, 1996, to 19.9% for the quarter
ended December 31, 1996.
Research and development expenses increased in the quarters ended September
30, 1996 and December 31, 1996 primarily due to software development personnel
added with the Crandell Acquisition in July 1996. The increase in research and
development expenses was also due to increased compensation expenses related
to the continuing employment of the founders of the Crandell Group. These
compensation expenses were based on a percentage of ongoing desktop software
sales and will be paid in full and terminate upon the closing of the Offering.
Additionally, quick turnaround prototype expenses for ASICs and printed
circuit board manufacture related to the Company's third generation controller
for laser MFPs contributed to higher expenses in the quarter ended September
30, 1996.
General and administrative expenses decreased in the quarter ended June 30,
1996 from the quarter ended March 31, 1996 due to lower headcount. Expenses in
the September 30, 1996 and December 31, 1996 quarters increased due to higher
headcount, legal and consulting expenses and bank fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date principally through private
placements of debt and equity securities, proceeds from borrowings under a
bank line of credit and debt associated with the Crandell Acquisition. The
total amount of equity raised through March 31, 1997 in the form of Common
Stock and Series A through F Convertible Preferred Stock was $13.5 million.
Additionally, $2.8 million of Series P Redeemable Preferred Stock was
outstanding on March 31, 1997. See Notes 9 and 10 of Notes to Financial
Statements. The Series A through F Convertible Preferred Stock will convert
into Common Stock upon the closing of the Offering. The holder of the Series P
Redeemable Preferred Stock has elected to have the stock and accrued dividends
redeemed at the closing of the Offering.
At March 31, 1997, $1.5 million of debt was outstanding, which consisted of
$1.0 million under a bank line of credit, a $244,000 equipment term loan and a
$250,000 note payable related to the Crandell Acquisition. At March 31, 1997,
the Company had $452,000 available under its bank credit facility. See Note 7
of Notes to Financial Statements. This lending facility is collateralized by
substantially all of the Company's assets. The maximum amount available under
the line of credit is the lesser of $1.5 million or 75% of the Company's
eligible outstanding accounts receivable. The revolving line of credit
terminates in August 1997 and is subject to renegotiation at that time. The
Company also has $244,000 outstanding under an equipment loan due in monthly
30
<PAGE>
installments through February 2000. The interest rate on the line of credit is
the bank's prime rate (8.5% as of March 31, 1997) plus 1.0%; the interest rate
on the equipment term loan is the bank's prime rate plus 1.5%. The line of
credit and equipment term loan contain certain covenants which, among other
things, require the Company to maintain tangible net worth (as defined) of
$2.5 million, quarterly net income, a quick ratio of 0.8 to 1.0, a maximum
debt to net worth ratio (as defined) of 2.0 to 1.0 (1.5 to 1.0 after December
31, 1996) and certain minimum liquidity and debt service coverage. In
addition, the agreement prohibits the payment of cash dividends. In March
1997, the Company received a waiver of the quarterly net income and certain
other covenants in its bank line of credit through June 30, 1997. The $250,000
note payable to the Crandell Group is subordinated to the bank loan, is non-
interest bearing and matures July 31, 1997. See Notes 3 and 7 of Notes to
Financial Statements. The note to the Crandell Group is to be repaid in full
upon the closing of the Offering. See "Use of Proceeds."
Cash and cash equivalents decreased from $106,000 at December 31, 1996 to
$16,000 at March 31, 1997. Inventories increased $902,000 from $2.3 million at
December 31, 1996 to $3.2 million at March 31, 1997, due primarily to: (i)
stocking higher levels of consumables for the JetFax 4 and consumables and
product upgrades for the JetFax M5 to better match demand particularly as the
installed base of the JetFax M5 has grown, and (ii) increased parts inventory
to support projected higher sales levels. Accounts receivable increased
$764,000 from $2.4 million at December 31, 1996 to $3.2 million at March 31,
1997 principally due to the increase in product sales and higher receivables
related to development contracts. Net property and other assets increased by
$271,000 from $1.2 million at December 31, 1996 to $1.5 million at March 31,
1997, resulting primarily from a $243,000 increase in deferred costs related
to this Offering. Accounts payable increased from $1.9 million at December 31,
1996 to $3.0 million at March 31, 1997 related to the higher inventory levels
and deferred costs related to this Offering. During the quarter ended March
31, 1997, the Company borrowed $794,000 net against its bank line of credit to
cover working capital needs.
Cash and cash equivalents decreased from $3.5 million at March 31, 1996 to
$106,000 at December 31, 1996, due primarily to cash used in operations, which
included a $2.9 million reduction in accounts payable and accrued liabilities.
Accounts receivable increased by $515,000 from $1.9 million at March 31, 1996
to $2.4 million at December 31, 1996, mainly as a result of the higher revenue
levels. Inventories declined $1.0 million from $3.4 million at March 31, 1996
to $2.3 million at December 31, 1996, primarily attributable to more effective
inventory management. Net property and other assets increased by $1.0 million
from $199,000 at March 31, 1996 to $1.2 million at December 31, 1996, due
primarily to the software technology acquired in connection with the Crandell
Acquisition, the software and computers purchased for the integrated
manufacturing and accounting system, and material handling equipment. During
the nine months ended December 31, 1996, the Company borrowed $450,000 against
its bank line of credit to cover cash requirements.
Cash and cash equivalents increased from $122,000 at March 31, 1995 to $3.5
million at March 31, 1996, due principally to the issuance of Series F
Convertible Preferred Stock in March 1996. Accounts payable and accrued
liabilities increased by $2.6 million from $3.0 million at March 31, 1995 to
$5.6 million at March 31, 1996, resulting mainly from an extension of
payments. Accounts receivable increased by $467,000 from $1.5 million at March
31, 1995 to $1.9 million at March 31, 1996, primarily due to the higher
revenue levels. Inventories increased $1.9 million from $1.5 million at March
31, 1995 to $3.4 million at March 31, 1996, as the Company prepared for
forecasted increases in product shipment levels. Net property and other assets
were relatively unchanged at March 31, 1995 as compared to March 31, 1996.
The Company currently believes that the net proceeds of the Offering,
together with available borrowings under its line of credit and funds from
current and anticipated operations, will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next 18
months. If the Company acquires one or more businesses or products, the
Company's capital requirements could increase substantially. In the event of
such an acquisition or should any unanticipated circumstances arise which
significantly increase the Company's capital requirements, there can be no
assurance that necessary additional capital will be available on terms
acceptable to the Company, if at all.
31
<PAGE>
BUSINESS
OVERVIEW
JetFax, Inc. is a leading developer and provider of integrated embedded
system technology, branded products and desktop software solutions for the
multifunction product ("MFP") market, which consists of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
The Company focuses on two distinct segments of the MFP market, the small
office/home office ("SOHO") segment and the corporate segment.
The Company's embedded system technology is made up of proprietary ASICs,
software and firmware that reside on a modular controller circuit board (an
"embedded system"). This technology provides the intelligence of a MFP and
coordinates, controls and optimizes a MFP's printing, faxing, copying and
scanning operations. JetFax licenses and manufactures its embedded system and
desktop software for a range of MFP solutions sold under the JetFax brand name
and the brand names of its OEM customers. The Company believes its embedded
systems technology and desktop software enable OEMs to offer more competitive
products with improved price/performance, shortened development cycles and
reduced development and product costs. The Company currently licenses its
embedded system technology or software to 25 licensees worldwide, including
Hewlett-Packard, Oki Data, Samsung, Xerox and Intel.
Since its inception in 1988, the majority of the Company's revenues have
been generated from sales of JetFax branded products and consumables,
including the JetFax M5, the Company's current branded product. The Company
believes that it offers the most advanced and innovative MFP solutions
currently available in its product class. For example, the JetFax M5 was the
first MFP to support two telephone lines for simultaneous receiving and
sending of faxes, and the Company was one of the first to market a MFP with a
high speed 33.6 Kbps modem.
The Company believes its JetSuite software will define a new category of
all-in-one software for MFPs that will replace the piecemeal software
components historically bundled by MFP vendors. As a result, corporate and
SOHO workers can increase productivity and realize substantial time and cost
savings relative to traditional office protocols and equipment usage. The
Company's JetSuite desktop software can be sold on a stand-alone basis or
bundled with the JetFax embedded system to provide a complete, integrated
hardware and software solution. The Company plans to release JetSuite with
several OEM products in the third quarter of 1997. The Company also offers
JetPCL software, which provides high quality conversion of documents encoded
in Hewlett-Packard's Printer Control Language ("PCL"), the industry standard.
INDUSTRY BACKGROUND
Within the overall electronic office devices market, which includes
printers, faxes, copiers and scanners, the market for MFPs is rapidly growing.
The two fastest growing segments of the MFP market are the SOHO and corporate
segments based on unit sales. According to CAP Ventures, Inc., the total
United States market for MFPs is expected to increase from approximately $1.9
billion in 1996 to $7.6 billion in 2000, an annual compound growth rate of
more than 40%. The advent of MFPs has eroded the boundaries between the
previously distinct printer, fax, copier and scanner markets, allowing MFPs to
have particular success as a value-added substitute in the fax market. MFPs
are also recognized as an attractive alternative to single-function printers
because of the MFP's ability to manage and process information in both paper
and electronic formats. CAP Ventures, Inc. anticipates that 50% of the United
States fax market and 23% of the United States printer market will consist of
MFPs by the year 2000, with annual unit sales in the United States growing
from 1.3 million MFPs in 1996 to more than 5.9 million MFPs in 2000.
Because the SOHO end user is price sensitive and space limited, MFPs which
provide printing, plain paper and PC faxing, copying and scanning in one unit
for under $1,000 represent an efficient and affordable solution. In 1996,
there were $683 million in MFP sales into the SOHO market and in 2000, CAP
Ventures, Inc. expects there to be more than $2.3 billion in MFP sales into
the SOHO market, a compound annual growth rate of more than 35%.
32
<PAGE>
The corporate segment of the MFP market is evolving to meet information
processing and management demands that exceed the capabilities of traditional
electronic office devices. Historically, corporate end users have purchased
single-function fax machines as a cost-effective solution to their real-time
document communications needs. Today, MFPs are replacing stand-alone fax
machines by offering convenient access to printing, copying and scanning
capabilities without compromising the traditional corporate fax functionality.
CAP Ventures, Inc. forecasts that sales of MFPs into the United States
corporate market segment will grow from $294 million in 1996 to $1.2 billion
in 2000, a compound annual growth rate of 42%. Typical MFPs sold in the
corporate market sell for between $1,000 and $4,000 and are based on
laser/LED, rather than ink jet, printing engines, feature higher scanning and
transmission speeds and increased memory and paper capacities.
The Company believes that the increased demand for MFPs and related desktop
software is due to a number of favorable industry trends, including the
following:
Rapid, Widespread Growth of Paper and Electronic Information. The demand for
technology that addresses the needs for real-time processing, managing and
transmitting paper and electronic information is growing. As fax, e-mail and
the Internet become increasingly ubiquitous, electronic distribution of
documents is being recognized as a more efficient alternative than physical
distribution by mail or courier. Today's office workers benefit from the
ability to directly send, receive, print and scan documents at their PC.
Traditionally, this multitasking capability required purchasing, placing and
servicing separate single-function office products.
Increased Outsourcing by OEMs. The increasing rates of technological change
and product obsolescence continue to shorten the manufacturing, time-to-market
and product life cycles in today's MFP market. OEMs are under constant
pressure to develop new MFPs with enhanced functionality at the lowest
possible cost, resulting in increased complexity and development challenges.
Developing and manufacturing such increasingly complex MFPs requires advanced,
proven technology and broad research and development expertise. Unlike the
development of single function office products, MFP development requires
knowledge of printer, fax, copier and scanner technologies. Most single
function device manufacturers do not have expertise in all of the required
areas. Consequently, many OEMs opt to outsource their MFP design and software,
assembly of controller boards and product manufacturing to reduce costs and
time-to-market.
Demand for MFP Software. The architecture and software used by MFPs
represent a major departure from those used by stand-alone devices. MFPs
typically are shipped with a number of software packages intended for single
function use, requiring a customer to install and learn three or four
different interfaces to fully utilize their MFP. Today, the principal vendors
of MFPs bundle software packages which neither integrate nor easily exploit
all of the capabilities of the MFP. Most of the bundled software packages are
minor modifications of existing PC fax or scanner applications. In order to
fully utilize all of the capabilities of a MFP, users need fully integrated
desktop software.
Proliferation of SOHO Business Environment. Corporate restructuring and
downsizing and advances in telecommunication technologies have resulted in the
rapid growth of the number of SOHO offices. SOHO workers have essentially the
same quality and functional needs as workers in large corporate offices, but
lack the space and financial resources required for separate single-function
machines. MFPs offer print, fax, copy and scan functions in a single unit for
significantly less cost than would otherwise be incurred by purchasing each of
these products separately.
Increased Use of the Internet for Document Transmissions. As the number of
e-mail and Internet users increases, the use of the Internet for transmitting
and routing scanned documents has become very compelling. By using a MFP to
input documents to be routed over the Internet, the costs of transmitting
documents can be greatly reduced or eliminated and documents can be sent with
greater resolution and clarity than with typical fax transmissions. In
addition, documents sent directly to an individual's e-mail address as a file
attachment can be viewed, printed or deleted at their PC, thereby providing
improved confidentiality.
Increased Use of Consumables. By supporting multiple output functions
including PC printing, copying and receipt of plain paper faxes, MFPs may
consume a greater level of toner or ink cartridges than single function
33
<PAGE>
products such as printers or copiers. For a typical corporate MFP, the cost of
the consumables may match or exceed the cost of the actual MFP during the
first several years of the product's life. Typically, these consumables
generate higher margins than those of the products themselves.
THE JETFAX SOLUTION
JetFax's comprehensive solution is to offer to the SOHO and corporate
markets its proven embedded system technology, high quality branded MFPs and
advanced desktop software. JetFax's embedded system solutions for MFPs consist
of proprietary ASICs, software and firmware that reside on a controller
circuit board and represent the Company's core MFP technology. The MFP
embedded system is essentially the intelligence of the MFP, processing and
managing the print, fax, copy and scan functions of a MFP. The Company's third
generation embedded system technology is designed to enable OEMs to offer more
competitive products with improved price/performance, shorter development
cycles and reduced development and product costs. JetFax believes that its
embedded system technology allows an OEM to refresh or broaden its product
lines more quickly than it could through internal development of products.
JetFax manufactures and markets MFPs for resale under the JetFax brand name.
In addition, the Company has in the past manufactured products for its OEMs.
The products manufactured by the Company are targeted at the corporate MFP
market and have more advanced features than those found on typical SOHO MFPs.
These corporate features include higher scanning and transmission speeds,
increased memory and paper capacities, and improved reliability and
performance at greater usage levels. Through its branded products, the Company
believes that it is able to more quickly bring advanced and innovative MFP
features to market. For example, the JetFax M5 was the first MFP in its
product class to support two telephone lines for simultaneous receiving and
sending of faxes, and was one of the first to market a MFP with a high speed
33.6 Kbps modem. By integrating and testing products incorporating these
features, JetFax believes that it is able to reduce time-to-market for its
branded MFPs as well as those of its OEMs. JetFax also sells consumables for
its branded products that the Company believes will represent increasing
amounts of total product revenues as its installed base of MFPs grows.
The Company's primary software product, JetSuite, which is expected to be
released with several OEM products in the third quarter of 1997, provides a
fully integrated software application for a MFP. JetSuite operates with
JetFax's embedded system designs, as well as with those of its OEMs, to
provide an end user with access to all of the MFP's capabilities. JetSuite
integrates printing, PC faxing, scanning, document management and device
configuration into one package, eliminating the need to install and learn
multiple applications. JetSuite's foundation in portable document technology
allows the user to move easily between the hard copy world of printers and
faxes and the electronic world of e-mail and the Internet. By storing and
viewing all documents in JetSuite's portable document format, pages which are
either scanned at the MFP, created from any Windows application, or copied
from the Internet can be easily e-mailed and viewed by anyone using Microsoft
Windows 3.1 or Windows 95. As a single source of JetSuite software and JetFax
embedded system technology, JetFax believes it simplifies and accelerates an
OEM's ability to introduce MFPs into the market.
JETFAX STRATEGY
The Company's objective is to become a leading, single source for
multifunction products and solutions providing proven embedded system
technology, high quality branded products and advanced desktop software. The
key elements of the JetFax strategy include:
Offer Compelling MFP Solutions to OEMs. The Company plans to continue
leveraging its embedded system and software technologies by offering OEMs
compelling MFP solutions which reduce the OEM's time-to-market and development
and product costs. The Company licenses its embedded system technology and
software to OEMs for use in their MFPs which are sold into the SOHO and
corporate markets. The Company also offers a variety of product options,
ranging from assembled circuit boards to fully integrated products. The
Company is allocating substantial resources to the continued development of
innovative technologies which address the SOHO and corporate market
requirements for future MFP solutions.
34
<PAGE>
Expand Sales of JetFax Branded MFP and Related Consumables. The Company
seeks to increase the sales of its branded MFPs and consumables in the
corporate market through growth of its distribution channel and its
relationships with key dealers and major accounts. In the United States and
Canada, the Company distributes JetFax branded products, options and
consumables through IKON and office equipment dealers primarily associated
with Business Technology Association, formerly known as NOMDA, the largest
national association of office machine dealers focused on the sale of fax
machines and copiers ("BTA"). The Company intends to increase its penetration
of both the IKON and BTA dealer channels. The Company also intends to leverage
its dealer network and installed base of JetFax branded MFPs to increase sales
of consumables, thereby generating recurring revenues.
Establish JetSuite as the Leading MFP Desktop Software Application. JetFax
plans to establish its JetSuite software as the leading MFP desktop software
and anticipates releasing JetSuite with several OEM products in the third
quarter of 1997. JetSuite is designed to provide an end user with access to
all of the capabilities of a MFP from a single, integrated Microsoft Windows
application. This level of integration will enable OEMs to support a single
software package rather than the multiple, discrete applications utilized with
most MFPs today. The Company plans to license JetSuite software to a number of
OEMs. For example, the Company entered into license agreements for JetSuite
with Hewlett-Packard effective in January 1997 and Oki Data in September 1996.
The Company intends to maintain use of the Company's JetSuite trademark with
OEM products in order to gain further name recognition for both the Company
and its products. The Company also plans to offer upgrades and add-on software
products to end users who have purchased MFPs bundled with JetSuite software.
JetFax intends to build on JetSuite's foundation in portable document
technology to take advantage of a variety of document delivery systems
including the Internet.
Leverage International Relationships and Experience. Most foreign countries
require independent testing of each new MFP for compliance with
telecommunications and safety laws, which can take several months. The Company
has successfully taken products through international regulatory approval
processes in over 35 countries. JetFax believes that its international
experience and focus provide a competitive advantage and international markets
represent a source of potential growth. The Company plans to build on its long
history of international relationships, including those with a number of
dealers, distributors and telecom regulatory authorities, to market its
products abroad and obtain international regulatory approvals on new products.
By being able to offer its OEMs proven worldwide solutions and regulatory
experience, the Company believes it will enable its OEMs to achieve broader
international distribution in a shorter amount of time.
PRODUCTS
JetFax offers the following products and solutions to its OEMs and other
customers:
JetFax Branded Products and Related Consumables. JetFax develops,
manufactures and markets a high quality MFP under the JetFax brand name. For
this branded solution, JetFax procures an integrated printing and scanning
engine and integrates its embedded system technology with the engine at its
facility.
The Company's current branded MFP is the JetFax M5, which the Company began
shipping commercially in June 1995. The JetFax M5 offers the functionality of
a high-volume, full-featured plain paper fax machine in addition to its
multifunction print, copy and scan capabilities. The JetFax M5 is based on a
LED printer engine, which uses the same drum and toner print technology as a
laser printer ("laser/LED"). A range of upgrades is made available by the
Company to expand the capabilities of the JetFax M5, including a two-line
upgrade which allows simultaneous receiving and sending of faxes and a high-
speed modem upgrade for single-line models which allows the modem speed to be
increased from 14.4 Kbps to 33.6 Kbps, thereby reducing the transmission time
of a typical fax. List prices of the JetFax M5 range from approximately $3,000
to more than $4,000 depending on the options included.
35
<PAGE>
The following table lists the principal branded products developed, marketed
and shipped by the Company since 1989:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRODUCT NAME PRODUCT CATEGORY DATES SHIPPED AWARD(S) WON
- --------------------------------------------------------------------------------
<C> <C> <C> <S>
JetFax M5 High-volume 1995-present . "Pick of the Year" in 1996
laser/LED MFP by Buyer's Laboratory
. "Editor's Choice 96
Premium Laser Fax"
by Better Buys for Business
. "Win 100" for top computer
hardware by Windows
Magazine in 1996
. "Sehr gut" award by Facts
magazine in 1996
- --------------------------------------------------------------------------------
JetFax 4 Inkjet 1995-1996 . "Sehr gut" award by Facts
multifunction magazine in 1996
fax machine
- --------------------------------------------------------------------------------
JetFax 8000-D High-volume laser 1992-1995 . "Pick of the Year" by
fax machine Buyer's Laboratory in 1993
. "Award of Merit" by BYTE
magazine in 1992
- --------------------------------------------------------------------------------
JetFax II Printer add-on with 1991-1994 . "Best Fax Server" by
LAN fax server LAN magazine in 1991
capability
- --------------------------------------------------------------------------------
JetFax Laser printer add- 1989-1991 . "Best of Show" Comdex by
on for plain PC Week magazine in 1988
paper fax
- --------------------------------------------------------------------------------
</TABLE>
The Company also sells consumables for its products, including toner
cartridges, imaging drums and inkjet cartridges. These consumables, which need
to be purchased periodically by customers over the life of the product, are
typically procured by the Company from the manufacturer of the printing engine
and are labeled with the JetFax brand name. Certain consumables not procured
from the Company or its suppliers are not easily used with JetFax products or
do not provide optimal functionality. Revenues from sales of consumables
represented 16% and 18% of the Company's total revenues in the nine months
ended December 31, 1996 and the quarter ended March 31, 1997, respectively.
The Company believes that such revenues will increase as the installed base of
JetFax branded MFPs grows.
Embedded System Technology. JetFax develops and licenses its embedded system
technology for manufacture and integration by its OEM customers into their
MFPs. This technology includes a complete embedded system design, modified to
meet the OEMs' specifications and requirements. Such hardware and software
modifications are performed by JetFax and typically include changes to the
printer and scanner interfaces and to the control panel and user interface.
The Company generally receives development fees in return for such
modifications, in addition to prepaid and per unit royalties for the license.
The Company's embedded system technology has been customized and licensed for
use in the Minoltafax 1000, the Xerox 3006, the Xerox WorkCenter 250 and the
dex 855 manufactured by Samsung, and it is being customized for use by
Hewlett-Packard.
The Company offers completely assembled embedded system circuit boards to
its OEMs as well as systems integration services. An OEM can choose to procure
the embedded system boards directly from JetFax for integration at the OEM's
facility or the OEM can ship its printing/scanning engine to JetFax for final
assembly and testing. The Company believes its ability to offer a variety of
manufacturing and systems integration capabilities provides OEMs with a means
to reduce development costs and time-to-market.
JetSuite Software. The Company believes its JetSuite software will define a
new category of all-in-one software for MFPs that will replace the piecemeal
software components historically bundled by MFP vendors.
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Versions of JetSuite for Microsoft Windows 3.1 and Microsoft Windows 95 are
scheduled for commercial release with several OEM products in the third
quarter of 1997. A version for Microsoft Windows NT is under development.
JetSuite software is designed to provide a comprehensive software solution for
users of MFPs. JetSuite is installed on a user's PC and combines low-level
device drivers for printing, faxing, copying and scanning with a visual
"desktop" application that allows a user to organize, convert and manage
documents created or received using a MFP. In addition to basic MFP device
support and its desktop manager, JetSuite will provide other advanced
capabilities. Using JetSuite, a user will be able to create a self-viewing,
portable version of any document, whether "printed" electronically, captured
from an Internet Web page, scanned or faxed. Such a portable document can then
be e-mailed and viewed without requiring the recipient to have a specific
software application or viewer installed on their system. All of the
document's original formatting, layout, colors and look are maintained in a
portable JetSuite document. As a document communication tool, JetSuite will
fully support both fax-based and e-mail-based document transmission. JetSuite
will also provide links to popular third party software applications, such as
word processors and graphics programs, allowing users to move documents in and
out of the JetSuite desktop easily.
The Company offers JetSuite to OEMs for use with the OEMs' embedded system
or bundled with JetFax's embedded system technology. The Company also intends
to include JetSuite with JetFax branded MFPs. The Company will offer JetSuite
to OEM customers and end users in both standard and more full featured "pro"
versions. The Company also intends to develop JetSuite add-on software
products offering additional or advanced document management capabilities such
as advanced optical character recognition ("OCR") and enhanced search and
retrieval tools. JetFax believes that both the "pro" version and any add-on
products could be promoted to any base of standard JetSuite users as upgrades,
and that the "pro" version could also be promoted directly to end users of
existing MFPs that do not include JetSuite.
JetPCL. Hewlett-Packard's Printer Control Language ("PCL") is the industry
standard method of delivering commands from a PC software package to a
printer. The Company's JetPCL software is a PCL-emulator that provides high-
quality conversion of documents encoded in PCL into various image formats,
including fax. JetPCL is currently a leading PCL conversion package for
suppliers of standalone fax and network fax server products and the Company
has licensed JetPCL to more than 25 OEM customers. JetPCL also supports host-
based conversion of PCL for print devices, allowing lower cost printers to
support legacy DOS applications that generate PCL output. JetPCL is included
in the Company's JetSuite software, providing PCL capability for DOS-based
printing on MFPs. JetPCL supports PCL versions 4, 5 and 5E and is available on
the following platforms: DOS, DOS Extender, OS/2, NetWare NLM, Microsoft
Windows 3.1, Microsoft Windows 95, Microsoft Windows NT and major UNIX
platforms.
TECHNOLOGY
Embedded System Technology. JetFax's third generation embedded system
technology is based on the Company's application specific integrated circuit
("ASIC") semiconductor designs integrated with a Motorola 680X0
microprocessor. The specialized ASICs perform most of the heavy computational
tasks, allowing the single 680X0 microprocessor to drive the embedded system
and service all of the functions--printing, faxing, copying and scanning--
required by a MFP. The ASICs perform a variety of imaging functions and
provide high-speed data paths for large image data files that are quickly
moving through the various processes in the system. The ASIC imaging functions
include error diffusion scanning, edge enhancement, background compensation,
scaling and print smoothing. A high-speed image bus and numerous direct memory
access (DMA) channels are also provided by the ASICs to optimize system
performance and provide easy access to a specialized compression/decompression
imaging processor. The Company believes it has developed an economical
hardware design with enough modularity built in to support a range of products
and speeds, including such features as high speed 33.6 Kbps modems, quick
scanning of under three seconds per page and extensive battery-protected
memory.
The firmware in JetFax's embedded system is centered on the Company's task-
swapping, real-time operating system. The operating system rotates among the
various functions such as printing, faxing, copying or
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scanning, allocating enough processing time for each task to prevent any
significant performance deterioration when swapping among other tasks. The
majority of firmware in the Company's embedded system, including the operating
system, is written in assembly code, which the Company believes provides
greater efficiency and maximum use of available processing power. The Company
constantly evaluates the level of assembly coding used in its systems and
incorporates higher-level languages in those areas where the use of such
languages may result in greater efficiencies.
Software Technology. The foundation of JetSuite, the Company's primary
software product, is its portable document technology which replicates
documents for storage, transmission and viewing. JetSuite portable documents
use a highly compressed print-imaging format containing a combination of text,
fonts, color, graphic elements (such as lines and circles) and bitmaps. This
portable document technology allows a single document data base to handle both
hard copy images from scanned or faxed documents and electronically created
documents. JetSuite portable documents (.JSD files) can easily be shared with
others by using a freely distributable compact version of the JetSuite viewer
that combines with a .JSD file to create a self-viewing document. Self-viewing
documents can be transmitted to other PC users through standard e-mail without
requiring the recipient to have a particular viewer or software application.
JetSuite integrates with leading e-mail applications to allow users to e-mail
any document displayed on the desktop by dragging and dropping the document to
the installed e-mail application icon.
JetSuite also provides a range of imaging functionality for fast viewing,
zooming and panning, as well as document markup and cleanup functionality. The
JetSuite scan function includes support of the industry standard TWAIN
interface, allowing users to scan documents directly to other scanning
applications. In its fax application, JetSuite includes full functionality for
both sending and receiving faxes, a phone book for managing names, addresses,
phone numbers and fax groups and an inbox and outbox for managing faxes.
JetSuite also includes integrated third party OCR technology, which allows
users to convert scanned text documents to editable text files in a variety of
different word processor and spreadsheet formats.
CUSTOMERS
The Company's customers include office equipment dealers and distributors
who resell the Company's branded MFPs, options and consumables as well as OEMs
that license the Company's embedded system technology and software and
manufacture and distribute MFPs.
JetFax Branded Products. In the United States and Canada, the Company
distributes JetFax branded products, options and consumables through office
equipment dealers, primarily through IKON and dealers associated with BTA. In
the fiscal year ended March 31, 1996, the nine months ended December 31, 1996
and the quarter ended March 31, 1997, revenues recorded by the Company from
dealers associated with IKON represented 13%, 21% and 25%, respectively, of
the Company's total revenues. The Company also distributes its products
through regional distributors. As of March 31, 1997, the Company had
approximately 200 dealer sales locations in the United States and Canada. The
Company sells its branded products internationally through office equipment
dealers. Sales to Messerli, one of the Company's office equipment dealers
located in Switzerland, accounted for 11%, 10% and 4% of the Company's total
revenues in the fiscal year ended March 31, 1996, the nine months ended
December 31, 1996 and the quarter ended March 31, 1997, respectively.
OEM Relationships and JetSuite Software. The Company receives license fees
and development fees for the Company's embedded system technology and desktop
software from a number of manufacturers of MFPs. JetFax currently licenses
embedded system technology or desktop software to 25 companies and has OEM
relationships with Hewlett-Packard, Oki Data, Samsung, Xerox and Intel.
Hewlett-Packard Company. Effective in January 1997, the Company entered into
a development and license agreement with Hewlett-Packard for the inclusion of
the JetFax embedded system technology and JetSuite software in a Hewlett-
Packard product which is currently under development.
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Oki Data Corporation. In September 1996, the Company entered into a license
agreement with Oki Data for the inclusion of JetSuite software with a number
of Oki Data MFPs which are currently under development.
Samsung Electronics Corporation. In June 1995, the Company entered into a
development agreement with Samsung for the use of the Company's third
generation embedded system technology in a new laser multifunction product.
This product which will originally be marketed by Danka Corporation in the
United States, was announced in February 1997 as the dex 855.
Xerox Corporation. JetFax began developing MFPs for Xerox in 1993, resulting
in the launch of the Xerox 3006 in November 1994 as the industry's first
inkjet 4-in-1 (print, fax, copy and scan) multifunction product. The Company
designed the complete mechanical enclosure of the Xerox 3006 in addition to
licensing the embedded system technology and software drivers for Xerox's
manufacture. The Xerox 3006 was launched in more than 30 countries and
continues to be sold through both Xerox direct sales forces and dealers in
both Europe and the United States. Subsequent to this development, JetFax
delivered a modified version of its embedded system technology to Xerox for
use in the Xerox WorkCenter 250, a retail MFP launched in October 1995
targeted at the SOHO market. The WorkCenter 250 received numerous industry
awards, including PC Magazine's "Best of 1995," Imaging Magazine's "Product of
the Year" for 1995, Home PC magazine's "Editor's Choice" in April 1996 and
Windows Magazine's "Win 100" Best Product in 1996.
Intel Corporation. The Company licenses its portable document software
technologies to Intel Corporation. Pursuant to the license agreement entered
into in 1994, Intel utilizes the Company's portable document technology in
Intel's Proshare video-conferencing system. This technology enables video-
conference users to capture and share documents on the screen during a video
conference call.
For a discussion of certain risks relating to the Company's reliance on its
OEMs, dealers and distributors, see "Risk Factors--Dependence on Dealers and
Distributors" and "--Dependence on OEMs."
SALES AND MARKETING
The Company markets and sells its products worldwide to OEMs, dealers and
distributors. The Company maintains separate sales forces for its branded
products and OEM/licensing businesses, and its marketing department supports
all aspects of the Company's worldwide business. As of May 1, 1997, the sales
and marketing department (including order entry, technology support and
customer service personnel) consisted of 27 employees and contractors.
OEM Relationships. The Company licenses its embedded system technology,
JetSuite software and JetPCL software to OEMs. The Company continues to
enhance its relationships with existing OEMs and seeks to obtain new OEM
customers through dedicated account management and marketing programs. The
Company works closely with OEM accounts to define product requirements, create
development plans and manage development programs. The marketing group
promotes JetFax as a leading provider to OEMs of MFP solutions through a
combination of public relations and press coverage, exhibits and presentations
at trade shows, product brochures and other marketing promotions.
JetFax Branded Products. The Company's branded products are primarily sold
in the United States through office equipment dealers. The Company's sales
force provides dealer training programs, sales incentive programs which
include cash incentives, group trips, volume discounts and market development
funds. Marketing activities to promote JetFax branded products include direct
mail, print advertising and an ongoing public relations program.
JetSuite Software. The Company anticipates releasing JetSuite with several
OEM products in the second quarter of 1997, and the Company's software
marketing strategy is to license JetSuite software for bundling with multiple
OEM products. In addition, the Company intends to promote JetSuite upgrades
and add-on software products in a number of ways, including in-box flyers,
software installation and reminder screens, mailings to registered users,
website advertisements and co-promotions with OEMs.
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The Company's international sales efforts are focused on Western Europe,
Australia and New Zealand. The Company's branded products are sold
internationally through office equipment distributors in Australia, Canada,
Germany, the Netherlands, New Zealand, Scandinavia, Switzerland and the United
Kingdom. The Company also sells directly to office equipment dealers in
Germany and the United Kingdom. The Company has sales, service or support
personnel located in Germany, the Netherlands, Ireland and the United Kingdom.
International marketing efforts are focused on providing country specific
marketing materials, sales incentive programs for dealers and participation in
trade shows.
RESEARCH AND DEVELOPMENT
JetFax's principal research and development activities are located at the
Company's headquarters in Menlo Park, California and at its software
applications division located in Santa Barbara, California. As of May 1, 1997,
the Company's research and development department consisted of 30 employees.
The primary activities of these employees are new product development,
enhancement of existing products, product testing and technical documentation.
The Company's research and development efforts focus on ongoing development
of both the Company's MFP embedded system technology and desktop software. The
Company is in the process of developing future MFPs with both improved feature
sets and reduced manufacturing costs. These improvements are expected to
include increased printing speed, additional base memory, higher speed
scanning, simpler PC connectivity and advanced compression algorithms that
will decrease fax transmission cost while increasing memory storage. In the
second half of 1997, the Company intends to begin commercial shipment of its
new branded MFP, which will include JetSuite software. The Company believes
that its branded product development efforts provide the Company with a
competitive advantage for its embedded system technology and software by
defining the needs for new products, guiding future enhancements and testing
new implementations. By introducing advanced new features in the corporate
market, the Company believes that it is able to maintain its technology lead
while further refining such features before introducing them to its OEMs. See
"Risk Factors--Risks Associated with Product Development and Introduction;
Product Delays."
COMPETITION
The market for MFPs and related technology and software is highly
competitive and characterized by continuous pressure to enhance performance,
to introduce new features and to accelerate the release of new products. The
Company's branded products compete primarily with the dominant vendors in the
fax market, all of whom have substantially greater resources than the Company
and include, among others, Canon Inc., Panasonic, a division of Matsushita
Electrical Industrial Co., Ltd., Pitney Bowes Inc., Ricoh Co. Ltd., Sharp
Electronics Corporation and Xerox. The Company also competes on the basis of
vendor name and recognition, technology and software expertise, product
functionality, development time and price.
The Company's technology, development services and software primarily
compete with solutions developed internally by OEMs. Virtually all of the
Company's OEMs have significant investments in their existing solutions and
have the substantial resources necessary to enhance existing products and to
develop future products. These OEMs have or may develop competing
multifunction technologies and software which may be implemented into their
products, thereby replacing the Company's proposed or current technologies,
eliminating a need for the Company's services and products to these OEMs. The
Company also competes with technologies, software and development services
provided in the MFP market by other systems and software suppliers to OEMs.
With respect to MFP embedded system technologies, the Company competes with,
among others, Peerless Systems Corporation, Personal Computer Products, Inc.
and Xionics Document Technologies, Inc. With respect to desktop software, the
Company competes with, among others, Caere Corporation, Simplify Development
Corporation, Smith Micro Software, Inc., Visioneer Inc., Wordcraft
International and Xerox.
As the MFP market continues to develop, the Company expects that competition
and pricing pressures will increase from OEMs, existing competitors and other
companies that may enter the Company's existing or future
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markets with similar or substitute products or technologies. Software
solutions may also be introduced by competitors that are less costly or
provide better performance or functionality. The Company anticipates
increasing competition for its MFPs, technologies and software under
development. Most of the Company's existing competitors, many of its potential
competitors and all of the Company's OEMs have substantially greater
financial, technical, marketing and sales resources than the Company. In the
event that price competition increases, competitive pressures could cause the
Company to reduce the price of its branded products, to reduce the amount of
royalties received on new licenses and to reduce the fees for its development
services in order to maintain existing business and generate additional
product sales and license and development revenue, which could reduce profit
margins and result in losses and a decrease in market share. No assurances can
be given as to the ability of the Company to compete favorably with the
internal development capabilities of its current and prospective OEM customers
or with other third-party vendors, and the inability to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company has no patents or patent applications
pending. As part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants, OEMs and
strategic partners and limits access to and distribution of its designs,
software and other proprietary information. Despite these efforts, the Company
may be unable to effectively protect its proprietary rights and, in any event,
enforcement of the Company's proprietary rights may be expensive. The
Company's source code also is protected as a trade secret. However, the
Company from time to time licenses portions of its source code and designs to
OEMs and also places such source code and designs in escrow to be released to
OEMs in certain circumstances, which subjects the Company to the risk of
unauthorized use or misappropriation despite the contractual terms restricting
disclosure. In addition, it may be possible for unauthorized third parties to
copy the Company's products or to reverse engineer or obtain and use the
Company's proprietary information. Further, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on the
Company's technology increasingly may become the subject of infringement
claims. The Company has in the past received communications from third parties
asserting that the Company's trademarks or products infringe the proprietary
rights of third parties or seeking indemnification against such infringement.
The Company is generally required to agree to indemnify its OEMs from third
party claims asserting such infringement. There can be no assurance that third
parties will not assert infringement claims against the Company or its OEMs in
the future. Any such claims, regardless of merit, could be time consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation to determine the
validity of any claims, whether or not such litigation is determined in favor
of the Company, could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel from daily
operations. In addition, the Company may lack sufficient resources to initiate
a meritorious claim. In the event of an adverse ruling in any litigation
regarding intellectual property, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing or substituted technology. The failure of the Company
to develop, or license on acceptable terms, a substitute technology could have
a material adverse affect on the Company's business, financial condition and
results of operations.
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MANUFACTURING AND OPERATIONS
The Company manufactures its JetFax branded products for distribution to the
corporate segment of the MFP market. The Company generally outsources
materials from suppliers and performs final assembly and testing at its main
facility in Menlo Park, California. As of May 1, 1997, the Company's
manufacturing and operations department consisted of 24 employees. See "Risk
Factors--Dependence on Single Manufacturing Facility; Risks Related to
Potential Disruption."
The JetFax M5 is the Company's current branded MFP. The major components of
the JetFax M5 are the print engine, the scanner, the user interface and the
multifunction embedded system technology and modem electronics, all of which
are outsourced. The JetFax embedded system and modem assemblies are built to
specification by an external printer circuit board assembler. Final product
assembly at the Company's headquarters consists of integrating the components
on a progressive assembly line. Each JetFax M5 is tested at the Company by an
internal self test for a period of not less than 24 hours, followed by a
series of functional and margin tests to help ensure reliable performance at
the customer's site. The Company's final assembly and test facilities have
recently been improved to allow for better material flow, process definition
and production efficiency.
The Company relies on various suppliers of components for its products. Many
of these components are standard and generally available from multiple
sources. However, there can be no assurance that alternative sources of such
components will be available at acceptable prices or in a timely manner. Any
shortage or interruption in the supply of any of the components used in the
Company's products, or the inability of the Company to procure these
components from alternate sources on acceptable terms, would have a material
adverse effect on the Company's business and financial condition and results
of operations. The Company generally buys components under purchase orders and
does not have long-term agreements with its suppliers. Although alternate
suppliers may be readily available for some of these components, for other
components it could take an undetermined amount of time to qualify a
replacement supplier and order and receive replacement components. The Company
does not always maintain sufficient inventory to allow it to fill customer
orders without interruption during the time that would be required to obtain
an adequate supply of single sourced components. Although the Company believes
it could develop other sources for single source components, no alternative
source currently exists and the process could take several months or longer.
Therefore, any interruption in the supply of such components could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Many of the components used in the Company's products are purchased from
suppliers located outside the United States. Foreign manufacturing facilities
are subject to risk of changes in governmental policies, imposition of tariffs
and import restrictions and other factors beyond the Company's control. There
can be no assurance that United States or foreign trading policies will not
restrict the availability of components or increase their cost. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Certain components used in the Company's products are available only from
one source. The Company is dependent on Oki America, as the supplier of major
components, including the printer engine, of the JetFax M5. Oki America is
also a competitor of the Company. The Company is also dependent on AMI to
provide unique ASICs incorporating the Company's imaging and logic circuitry,
Motorola to provide microprocessors, Pixel, to provide a specialized imaging
processor and Rockwell to provide modem chips. If Oki America, AMI, Motorola,
Pixel or Rockwell were to limit or reduce the sale of such components to the
Company, or if such suppliers were to experience financial difficulties or
other problems which prevented them from supplying the Company with the
necessary components, it would have a material adverse effect on the Company's
business, financial condition and results of operations. These sole source
providers are subject to quality and performance issues, materials shortages,
excess demand, reduction in capacity and/or other factors that may disrupt the
flow of goods to the Company or the Company's customers and thereby adversely
affect the Company's business and customer relationships. Any disruption in
the Company's sources of supply could limit or delay production or shipment of
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products incorporating the Company's technology, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing and Operations."
The Company recently installed and implemented a new management information
system and used the accounting applications of the system for the first time
in connection with the December 31, 1996 monthly accounting close. The Company
has also begun using the manufacturing applications for inventory control and
product ordering. However, further improvements in these systems are needed
and will continue to be needed in order to manage expected growth in revenue
and assets. There is no guarantee that the implementation of the management
information system will contribute to the Company's ability to manage its
growth and, furthermore, any problems encountered as a result of the
implementation of such system, including additional modules and features,
could adversely affect the Company's operations.
EMPLOYEES
As of May 1, 1997, the Company had 86 employees and 5 full-time equivalent
contractors. Of these persons, 30 were in research and development, 27 were in
sales and marketing, 24 were in manufacturing and operations and 10 were in
finance and administration. There is no labor union representation for any of
the Company's employees. The Company has never experienced a work stoppage,
and relations with employees are considered good. The Company hires contract
employees on an as-needed basis to meet temporary or specific needs.
PROPERTIES
The Company's headquarters and principal operations are in leased facilities
totaling approximately 38,000 square feet in Menlo Park, California, and the
lease for this facility expires in February 1998. The Company has a month-to-
month lease for approximately 2,400 square feet in Santa Barbara, California
for its software application organization. The Company believes that suitable
additional or alternative space at commercially reasonable terms will be
available in the future as required.
LITIGATION
To the Company's knowledge, there are no pending legal proceedings which are
material to the Company or its business to which it is a party or to which any
of its properties is subject.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of May 1, 1997 with
respect to the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rudy Prince............. 39 President, Chief Executive Officer
and Chairman of the Board
Michael Crandell........ 41 Vice President of Software
John H. Harris.......... 41 Vice President of International Operations
Hansgregory C. Hartmann. 39 Vice President of Manufacturing
Allen K. Jones.......... 49 Vice President of Finance, Chief Financial Officer
and Secretary
Lon B. Radin............ 46 Vice President of Engineering and Director
Thomas B. Akin (1) (2).. 45 Director
Douglas Y. Bech (1) (2). 51 Director
Steven J. Carnevale (2). 41 Director
Chung Chiu.............. 63 Director
Shelley A. Harrison (1). 54 Director
Edward R. Prince, Jr.
(1)..................... 67 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
RUDY PRINCE co-founded the Company and has served as its President and Chief
Executive Officer and a member of the Board of Directors since August 1988.
Mr. Prince was appointed as the Chairman of the Board of Directors in October
1996. From June 1985 to February 1988, Mr. Prince was the Vice President of
Sales and Marketing at Entropic Speech, Inc., a manufacturer of
telecommunications products. Prior to that, Mr. Prince served as Sales Manager
with Digicon, Inc., a geophysical contractor ("Digicon"), from March 1980 to
June 1985. From August 1978 to March 1980, Mr. Prince served as a marketing
representative with the Data Processing Division of International Business
Machines Corporation. Mr. Prince holds a B.S. in Mechanical Engineering from
the University of Texas at Austin. Mr. Prince is the son of Edward R. Prince,
Jr., a director of the Company.
MICHAEL CRANDELL joined the Company in July 1996 as the Vice President of
Software. From January 1993 to July 1996, Mr. Crandell served as the President
of the Crandell Group, the assets of which were purchased by the Company in
July 1996. Prior to that, Mr. Crandell served as the President of Crandell
Development Corporation, a software development company from November 1984 to
December 1992. From 1981 to November 1984, Mr. Crandell worked as a Software
Engineer with Compucorp, Inc. Mr. Crandell holds a B.A. in Religious Studies
from Stanford University.
JOHN H. HARRIS joined the Company in March 1990 as the Vice President of
International Operations. From July 1987 to February 1990, Mr. Harris served
in various sales management positions with Landmark Graphics Corporation, a
supplier of graphics workstations for the oil industry, most recently as the
Regional Sales Director. From May 1981 to June 1987, Mr. Harris served as the
North American Sales Manager and Far East Sales manager for Digicon. Mr.
Harris holds a B.A. in Marketing from the University of Houston.
HANSGREGORY C. HARTMANN joined the Company in August 1995 as the Vice
President of Manufacturing. From June 1980 to August 1995, Mr. Hartmann held
various positions with Hewlett-Packard. From November 1992 to August 1995, he
was the Manager of the Channel Development and Information Services for U.S.
Channel Marketing in the Computer Products Organization of Hewlett-Packard
and, from September 1991 to
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November 1992, he was the Business Development Manager for the North American
Distribution Operation of Hewlett-Packard. From July 1985 to September 1991,
Mr. Hartmann served as the Engineering Manager for the Personal Computer
Distribution Operation of Hewlett-Packard. Mr. Hartmann holds a B.S. in
Electrical Engineering from the New Jersey Institute of Technology and a M.S.
in Manufacturing Systems Engineering from Stanford University.
ALLEN K. JONES joined the Company in May 1996 as the Vice President of
Finance, Chief Financial Officer and Secretary. From January 1976 to January
1996, Mr. Jones served in various positions with Varian Associates, Inc., a
diversified electronics company, most recently as the Vice President and
Controller from January 1995 to January 1996 and prior to that as the Vice
President and Treasurer from May 1990 to December 1994. Mr. Jones holds a B.S.
in Chemical Engineering from Cornell University and a M.B.A. from the Wharton
School of Finance at the University of Pennsylvania.
LON B. RADIN co-founded the Company and serves as the Vice President of
Engineering and a member of the Board of Directors of the Company. Dr. Radin
also served as the Chairman of the Board of Directors from August 1988 to
October 1996. From 1986 to 1988, Dr. Radin was the sole proprietor of L-Tel
Laboratories, a developer of digital fax telephone devices. From 1981 to 1986,
Dr. Radin served in various positions, most recently as the Director of
Software and Manager of Research with Time & Space Processing, Inc., a
software developer of telecommunications products for the defense industry.
Prior to that Dr. Radin served as a software services consultant for The
Systems Group, an engineering consulting firm from 1976 to 1981. Dr. Radin
holds a B.S. in Physics and Mathematics from the University of Michigan and a
Ph.D. and an M.A. in Mathematics from the University of California at
Berkeley.
THOMAS B. AKIN has served as a director of the Company since July 1996.
Since October 1995, Mr. Akin has served as a Managing General Partner of
Talkot Partners II, LLC, an investment firm. From November 1981 to February
1994, Mr. Akin served in various capacities, most recently as the Managing
Director of Western Regional Sales for Merrill Lynch & Co. Mr. Akin was on a
leave of absence from Merrill Lynch & Co. from February 1994 until his
retirement in April 1997. Mr. Akin holds a B.A. in Biology from the
University of California at Santa Cruz and an M.B.A. from the University of
California at Los Angeles.
DOUGLAS Y. BECH has served as a director of the Company since August 1988.
Mr. Bech was a founding partner of and, since August 1994 has served as a
Managing Director of Raintree Capital Company, LLC, a merchant banking firm.
In addition, since October 1994, Mr. Bech has been a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a law firm. From May 1993 through July 1994,
Mr. Bech was a partner of Gardere & Wynne, L.L.P., a law firm. From September
1970 to May 1993, Mr. Bech was associated with or a partner of the law firm
Andrews & Kurth L.L.P. Mr. Bech holds a B.A. in Political Science from Baylor
University and a J.D. from The University of Texas Law School. Mr. Bech is a
director of Wainoco Oil Corporation, Pride Companies, L.P. and several private
companies.
STEVEN J. CARNEVALE has served as a director of the Company since July 1996.
In July 1996, Mr. Carnevale became a General Partner in Talkot Capital, LLC,
an investment firm. From August 1992 to July 1996, Mr. Carnevale was a General
Partner of Endeavor Capital Management, an investment firm. From November 1990
to August 1992, Mr. Carnevale was the owner and CEO of Orca Industries, a
specialty computer manufacturer. Mr. Carnevale holds a B.S. in Engineering
from the University of Michigan.
CHUNG CHIU has served as a director of the Company since August 1991. Since
October 1978, Mr. Chiu has served as the Managing Director of Ailicec
International Enterprises Limited, a textile, electronics and machineries
conglomerate with operations largely in the Peoples Republic of China.
SHELLEY A. HARRISON has served as a director of the Company since February
1995. Since 1987, Dr. Harrison has been one of the general partners of the
high technology venture capital fund, Poly Ventures, Limited Partnership and
Chairman and Chief Executive Officer of Spacehab Inc., a developer of
pressurized laboratory and logistics modules. Dr. Harrison served as President
of Harrison Enterprises, Inc., a technology investment consulting firm, from
1982 to 1987. Prior to that Dr. Harrison served as Chairman and Chief
45
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Executive Officer of Symbol Technologies, Inc., a manufacturer of bar code
laser scanners from 1973 to 1982. Dr. Harrison holds a B.S. in Electrical
Engineering from New York University and a M.S. and Ph.D. in Electrophysics
from Polytechnic University. Dr. Harrison is a trustee of Polytechnic
University and is a director of Spacehab Inc., NetManage Inc. and several
private companies.
EDWARD R. PRINCE, JR. has served as a director of the Company since August
1988. Since August 1994, Mr. Prince has served as the Vice Chairman of Zydeco
Exploration, Inc. and Zydeco Energy, Inc., oil and gas exploration companies.
Prior to that from November 1970 to May 1994, Mr. Prince served in various
capacities, most recently as the Chairman and Chief Executive Officer of
Digicon. Mr. Prince holds a B.S. from the United States Military Academy at
West Point and an M.S. in Applied Mathematics from North Carolina State
College. Mr. Prince is the father of Rudy Prince, the Company's Chairman of
the Board, Chief Executive Officer and President. Mr. Prince is a director of
Geoscience Corporation and Zydeco Energy, Inc.
Currently all directors are elected annually and serve until the next annual
meeting of stockholders or until the election and qualification of their
successors. All executive officers serve at the discretion of the Board of
Directors.
COMPENSATION OF DIRECTORS
The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committee thereof, but the non-
employee directors are reimbursed for reasonable expenses incurred in
connection with attendance at Board and committee meetings.
In March 1997, the Company adopted the 1997 Director Option Plan, pursuant
to which the Company's non-employee directors who are directors on the
effective date of this Offering will receive an option to purchase shares of
the Company's Common Stock on the effective date of the Offering and annually
thereafter and each director who becomes a director after this Offering
receives an option to purchase shares of the Company's Common Stock upon
joining as a director of the Company and annually thereafter. See "--Incentive
Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the nine months ended December 31, 1996, Messrs. Akin, Bech and
Harrison and Mr. Edward R. Prince, Jr. served as the Compensation Committee of
the Company's Board of Directors. During the nine months ended December 31,
1996, no interlocking relationship existed between any member of the Company's
Compensation Committee and any other member of the Company's Board of
Directors. Mr. Edward R. Prince, Jr. is the father of Rudy Prince, the
Company's Chairman of the Board, Chief Executive Officer and President.
46
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and each of the Company's
three other most highly compensated executive officers (collectively, the
"Named Executive Officers") during the nine months ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING
OPTIONS/
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) SARS (#)
--------------------------- ---------- --------- ------------
<S> <C> <C> <C>
Rudy Prince.................................. $ 102,995 -- 100,000
President, Chief Executive Officer and
Chairman of the Board
Lon B. Radin................................. 92,604 -- 100,000
Vice President of Engineering
John H. Harris............................... 81,641 -- 50,000
Vice President of International Operations
Hansgregory C. Hartmann...................... 76,974 $ 5,000 60,000
Vice President of Manufacturing
</TABLE>
- --------
(1) The salaries and bonus set forth in the table are given for the fiscal
year ended December 31, 1996, which is a nine-month period. For the
twelve-month period ended December 31, 1996, the salaries earned by each
Named Executive Officer were as follows: Rudy Prince, $129,245; John H.
Harris, $105,489; Hansgregory C. Hartmann, $101,974 and Lon B. Radin,
$118,854.
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<PAGE>
OPTION GRANTS, EXERCISES AND HOLDINGS
Option Grants. The following table sets forth certain information regarding
options granted to the Named Executive Officers during the nine months ended
December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM (4)
OPTIONS FISCAL YEAR PRICE EXPIRATION ------------------------
NAME GRANTED (#) (1) ($/SHARE)(2) DATE (3) 5%($) 10%($)
---- ----------- ------------ ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rudy Prince (5)......... 100,000 9.9% $ 0.50 10/03/06 $ 31,445 $ 79,687
Lon B. Radin (5)........ 100,000 9.9 0.50 10/03/06 31,445 79,687
John H. Harris (5)...... 50,000 5.0 0.30 04/25/06 9,433 23,906
Hansgregory C. Hartmann
(5) ................... 50,000 5.0 0.30 04/25/06 9,433 23,906
10,000 1.0 1.25 10/31/06 7,861 19,922
</TABLE>
- --------
(1) The Company granted options to employees to purchase 1,009,000 shares of
Common Stock during the nine months ended December 31, 1996.
(2) The exercise price may be paid in cash, check, promissory note or shares
of the Company's Common Stock through a cashless exercise procedure
involving same-day sale of the purchased shares or by any combination of
such methods.
(3) Options may terminate before their expiration date if the optionee's
status as an employee or consultant is terminated or upon optionees'
death.
(4) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
(5) Each option vests at the rate of 1/4th of the shares subject to the option
at the end of twelve months and 1/48th of the shares subject to the option
at the end of each monthly period thereafter as long as such optionee's
employment has not terminated.
48
<PAGE>
Option Exercises and Holdings. The following table sets forth certain
information regarding options held as of December 31, 1996 by the Named
Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END ($)(1)
------------------------------ -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Rudy Prince............. 0 100,000 0 $ 350,000
Lon B. Radin............ 0 100,000 0 350,000
John H. Harris.......... 0 50,000 0 185,000
Hansgregory C. Hartmann. 16,666 43,334 61,664 150,836
</TABLE>
- --------
(1) Calculated based on fair market value of the Common Stock of $4.00 per
share, less the exercise price. The fair market value of the Common Stock
was determined by the Board of Directors to be $4.00 per share on January
22, 1997, which is the first date following December 31, 1996 on which
such a determination was made by the Board of Directors.
There were no option exercises by any of the Named Executive Officers during
the nine months ended December 31, 1996.
EMPLOYMENT AGREEMENT
In July 1996, in connection with the Crandell Acquisition, the Company and
Michael Crandell entered into a two-year employment agreement whereby Mr.
Crandell serves as Vice President of Software of the Company. Pursuant to such
agreement, Mr. Crandell receives a salary of $110,000 annually and was granted
an option to purchase 187,500 shares of Common Stock at $0.30 per share under
the Company's 1995 Plan. One-fourth of the shares covered by this option vest
on July 31, 1997, and the balance vest at the rate of 1/48th per month. Mr.
Crandell's employment can be terminated if there is any material breach or
default by the Crandell Group of any term or condition of the Crandell Asset
Purchase Agreement or any material breach by the Company of certain of the
material covenants set forth in such agreement. The employment agreement
contains a five-year non-compete provision.
INCENTIVE STOCK PLANS
1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Plan") was adopted by the Board of Directors in May 1989 and amended in May
1990 and July 1991 and approved by the Company's stockholders in August 1990
and August 1991. A total of 300,000 shares of Common Stock were reserved for
issuance under the 1989 Plan. By its terms the 1989 Plan terminated in May
1992. As of May 1, 1997, 164,599 shares had been issued upon the exercise of
stock options granted under the 1989 Plan and 63,910 shares were subject to
outstanding options. Options granted under the 1989 Plan generally vest over a
four year period of time with 1/4 of the shares subject to the option vesting
one year after the vesting commencement date and 1/48th of the shares subject
to the option vesting monthly thereafter, and must be exercised within five
years of the date of grant.
1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Plan") was adopted
by the Board of Directors in December 1995 and amended in September 1996 and
approved by the Company's stockholders in October 1996. The 1995 Plan was
further amended in February 1997 and March 1997 by the Board of Directors and
such amendments were approved by the stockholders in March 1997. A total of
3,400,000 shares of Common Stock have been reserved for issuance under the
1995 Plan. As of May 1, 1997, no shares had been issued upon the exercise of
stock options granted under the 1995 Plan, 1,096,725 shares were subject to
outstanding options and 2,303,275 shares remained available for future grant.
No stock purchase rights are outstanding under the
49
<PAGE>
1995 Plan. The 1995 Plan is presently administered by a committee of at least
two members of the Board of Directors, and such committee may consist of the
entire Board. Following this Offering, the committee administering the 1995
Plan must consist of at least two outside directors. Under the 1995 Plan,
options and stock purchase rights may be granted to officers and employees,
including directors who are employees or consultants. Only employees may
receive "incentive stock options," which are intended to qualify for certain
favorable tax treatment. The exercise price of incentive stock options under
the 1995 Plan must at least equal the fair market value of the Common Stock on
the date of grant. The exercise price of options granted to a ten-percent
stockholder must be at least 110% of the fair market value on the date of
grant and would be non-statutory stock options. Options granted under the 1995
Plan generally vest over a four year period, with 1/4 of the shares subject to
the option vesting one year after the vesting commencement date and 1/48th of
the shares subject to the option vesting monthly thereafter. Options granted
under the 1995 Plan must be exercised within ten years of the date of grant
(five years in the case of an incentive stock option granted to a ten-percent
stockholder).
Stock purchase rights may be granted alone or in tandem with options under
the 1995 Plan and a purchaser shall have not more than 120 days in which to
accept the offer. The purchase price of a stock purchase right shall be no
less than 85% of fair market value on the date of grant (100% of fair market
value in the case of stock purchase rights granted to a ten-percent
stockholder). In the event of a proposed dissolution or liquidation of the
Company or a merger in which the successor corporation does not agree to
assume the options or substitute equivalent options then the Board shall give
optionees and purchasers at least 15 days prior notice of the proposed action.
To the extent such options or stock purchase rights have not been exercised
the options and stock purchase rights will terminate immediately prior to the
consummation of such proposed action. The Board may amend or modify the 1995
Plan at any time. The 1995 Plan will terminate in December 2005, unless
terminated sooner by the Board.
1997 Director Option Plan. The Company's 1997 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in March 1997 and was
approved by the stockholders in March 1997. A total of 270,000 shares of
Common Stock have been authorized for issuance under the Director Plan. Each
nonemployee director who is a director on the date of this Prospectus and each
director who becomes a director after the date of this Prospectus will
automatically be granted a nonqualified option to purchase 20,000 shares of
Common Stock on the date on which such person first becomes a director (an
"Initial Grant") and 5,000 shares of Common Stock on the date of the annual
meeting of stockholders each year thereafter (an "Annual Grant"). The exercise
price of each of these options will be equal to the fair market value of the
Common Stock on the date of grant. One-fourth of each Initial Grant will vest
on each year over a four-year period and the Annual Grants will vest in full
on the four year anniversary of the date of grant. All such options will
expire ten years from the date of grant unless terminated sooner pursuant to
the provisions of the Director Plan. The Director Plan will terminate in March
2007 unless terminated earlier in accordance with the provisions of the
Director Plan.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
February 1997 and was approved by the stockholders in March 1997. A total of
500,000 shares of Common Stock have been authorized for issuance under the
Purchase Plan. No shares have been issued under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"), will be administered by the
Board of Directors of the Company or by a committee appointed by the Board of
Directors. Under the Purchase Plan, the Company will withhold a specified
percentage (not to exceed 10%) of each salary payment to participating
employees over certain offering periods. Any employee who is currently
employed for at least 20 hours per week and for at least five consecutive
months in a calendar year, either by the Company or by a majority-owned
subsidiary of the Company, will be eligible to participate in the Purchase
Plan. As of May 1, 1997, approximately 90 employees met the Purchase Plan's
eligibility requirements. Unless the Board of Directors or its committee
determines otherwise, each offering period will run for twelve months and will
be divided into two consecutive purchase periods of approximately six months.
The first offering period and the first purchase period will commence on the
date of this Prospectus and continue until December 31, 1997. New
50
<PAGE>
twelve-month offering periods will commence every six months thereafter. In
the event of a change in control of the Company, including a merger or sale of
substantially all of the Company's assets, each option under the Purchase Plan
may be assumed by any successor corporation, or the offering periods then in
progress may be shortened and all options automatically exercised. The price
at which Common Stock will be purchased under the Purchase Plan is equal to
85% of the fair market value of the Common Stock on the first day of the
applicable offering period or the last day of the applicable purchase period,
whichever is lower. Employees may end their participation in the offering at
any time during the offering period, and participation ends automatically on
termination of employment with the Company. The maximum number of shares that
a participant may purchase on the last day of any purchase period is
determined by dividing the payroll deductions accumulated during the purchase
period by the purchase price. However, no person may purchase shares under the
Purchase Plan to the extent such person would own 5% or more of the total
combined value or voting power of all classes of the capital stock of the
Company or of any of its subsidiaries, or to the extent that such person's
rights to purchase stock under all employee stock purchase plans would accrue
at a rate that exceeds $25,000 worth of stock for any calendar year.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions.
In addition, the Bylaws of the Company provide that the Company is required to
indemnify its officers and directors under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors
as incurred in connection with proceedings against them for which they may be
indemnified. The Company has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors
or officers (other than liabilities arising from willful misconduct of a
culpable nature), to advance expenses incurred as a result of any proceeding
against them as to which they could be indemnified and to obtain directors'
and officers' insurance if available on reasonable terms. At present, the
Company is not aware of any pending or threatened litigation or proceeding
involving a director, officer, employee or agent of the Company in which
indemnification would be required or permitted. The Company believes that its
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
51
<PAGE>
CERTAIN TRANSACTIONS
In March 1997, the Company entered into an agreement with Rudy Prince,
President, Chief Executive Officer and Chairman of the Board of the Company,
and Lon B. Radin, Vice President of Engineering and a director of the Company,
granting each of them piggy-back registration rights with respect to the
shares of the Company's Common Stock held by them.
In connection with the Crandell Acquisition in July 1996, the Company
acquired substantially all of the assets of the Crandell Group in exchange for
a cash payment of $250,000, a non-interest bearing promissory note of the
Company in the amount of $250,000 payable in July 1997 and an agreement to
make certain ongoing royalty payments to the Crandell Group. Payment of the
promissory note and the ongoing royalty payments were secured pursuant to the
terms of a Security Agreement. In addition, the Company entered into
employment agreements with Michael Crandell and Larry Crandell, the principals
of the Crandell Group. The Company also issued options to purchase an
aggregate of 280,000 shares of the Company's Common Stock to certain former
employees of the Crandell Group who were hired by the Company, including
187,500 shares to Michael Crandell and 62,500 shares to Larry Crandell, at an
exercise price of $0.30 per share (the estimated fair market value of the
Company's Common Stock at the grant date), subject to vesting over 4 year
periods (except for a 2 year vesting period as to Larry Crandell). In December
1996, the Company and the Crandell Group entered into an amendment agreement
(the "Amendment Agreement") providing that the obligation of the Company to
make certain ongoing royalty payments would terminate upon the Company's
initial public offering in exchange for a single lump sum payment provided
such offering occurs prior to July 31, 1998. Pursuant to the Amendment
Agreement, the Company issued warrants, exercisable at $1.75 per share (the
estimated fair market value of the Company's Common Stock at the grant date),
to Michael Crandell and to Larry Crandell to purchase 75,000 shares and 25,000
shares of the Company's Common Stock, respectively, such warrants exercisable
upon the effectiveness of the Company's initial public offering. Michael
Crandell is the Company's Vice President of Software.
In March 1996, pursuant to a Series F Convertible Preferred Stock Purchase
Agreement, the Company issued an aggregate of 3,445,690 shares of its Series F
Convertible Preferred Stock for aggregate consideration of $9.5 million at a
purchase price of $2.75 per share to a group of investors, including Talkot
Partners II, LLC ("Talkot Partners") (1,534,545 shares), Poly Ventures II,
L.P. (371,905 shares) and Douglas Y. Bech (10,000 shares). Thomas B. Akin, a
director of the Company, is a Managing Partner of Talkot Partners, a principal
stockholder of the Company. Shelley A. Harrison, a director of the Company, is
one of the general partners of Poly Ventures, Limited Partnership, the General
Partner of Poly Ventures II, Limited Partnership, and Mr. Bech is a director
of the Company.
As of March 1996, the Company issued options, exercisable at $1.72 per
share, to Steven J. Carnevale to purchase 260,265 shares of the Company's
Common Stock and to Thomas B. Akin to purchase 33,472 shares of the Company's
Common Stock, pursuant to the terms of the Company's letter agreement of
December 15, 1993 with Endeavor Capital Management ("Endeavor"), as amended.
Such options, along with a cash finders fee of $459,535, were paid for
services rendered with respect to the Company's Series F Convertible Preferred
Stock financing. From December 1993 until December 1996, Endeavor received
$124,000 for financial consulting services performed for the Company. Mr.
Carnevale, a director of the Company, was a General Partner of Endeavor. Mr.
Akin is a director of the Company.
In March 1996, in order to comply with certain provisions of California law,
the Company made a recision and repurchase offer to all employees and
consultants granted options under the Company's 1989 Stock Plan from and after
May 5, 1992. Such recision and repurchase offer provided that those who
accepted such offer were to receive $0.04 for each option and $0.20 (plus
interest at 7% per annum) for each share rescinded and repurchased. None of
the Company's employees or consultants accepted the rescission and repurchase
offer.
Pursuant to a promissory note dated March 1, 1992, the Company owed Lon B.
Radin, Vice President of Engineering and a director of the Company, the
principal amount of $50,140 for the transfer of certain technology from a
company of which Mr. Radin was a principal. An aggregate of $66,289 in
principal and accrued interest was paid in full by the Company in May 1996.
52
<PAGE>
In December 1994, pursuant to an Inkjet License and Supply Agreement (the
"Inkjet Agreement"), the Company granted certain licenses and sublicenses to
Ailicec (B.V.I.) Limited, an affiliate of Ailicec International Enterprises
Limited ("Ailicec International"), with respect to certain technology
developed by the Company and by Xerox Corporation in connection with an inkjet
product and agreed to supply Ailicec (B.V.I.) Limited with such products and
related components and consumables. Ailicec (B.V.I.) Limited purchased
products, components and consumables from the Company under the Inkjet
Agreement in an aggregate amount of approximately $503,000 during the
Company's fiscal years ended March 31, 1995 and March 31, 1996, and the nine
months ended December 31, 1996. Ailicec International is a principal
stockholder of the Company. Chung Chiu, a director of the Company, is the
Managing Director of Ailicec International.
In August 1994, January 1995 and October 1995, pursuant to a Note Purchase
Agreement, a Security Agreement and an Intercreditor Agreement, the Company
issued its 10% senior secured notes in an aggregate principal amount of $3.0
million (the "Bridge Notes") and warrants to purchase an aggregate of 675,156
shares of Common Stock at $2.15 per share (the "Bridge Warrants") to a group
of investors, including Thomas and Karen Akin ($500,000 in Bridge Notes and
106,511 shares of Bridge Warrants), Poly Ventures II, Limited Partnership,
($500,000 in Bridge Notes and 141,860 shares of Bridge Warrants) and Curtis J.
Pabst ($100,000 in Bridge Notes and 19,069 shares of Bridge Warrants). If not
previously exercised, the Bridge Warrants will automatically net exercise upon
the closing of the Offering. Mr. Akin, a director of the Company, is a
Managing Partner of Talkot Partners, Shelley A. Harrison, a director of the
Company, is one of the general partners of Poly Ventures, Limited Partnership,
the General Partner of Poly Ventures II, Limited Partnership, and Mr. Pabst is
a Managing Partner of Talkot Partners. All of the Bridge Notes have been
either converted into the Company's Series F Convertible Preferred Stock or
repaid by the Company.
In August 1994, the Company entered into a Purchase and Debt Restructuring
Agreement (the "Restructuring Agreement"), a Security Agreement and an
Intercreditor Agreement with Ailicec International. Ailicec International is a
principal stockholder of the Company. Chung Chiu, a director of the Company,
is the Managing Director of Ailicec International. Under the Restructuring
Agreement, in exchange for the conversion of debt of the Company in the
aggregate principal amount of $2.6 million, the Company issued Ailicec
International 344,350 shares of the Company's Series P Redeemable Preferred
Stock. In addition, a warrant to purchase 388,500 shares of the Company's
Series E Convertible Preferred Stock (the "Series E Warrant") was issued to
Ailicec International pursuant to the Restructuring Agreement. The Series E
Warrant has an exercise price of $2.75 per share and expires on October 4,
1999. The Company's Series P Redeemable Preferred Stock bears 6% cumulative
dividends, may be converted into the Company's Common Stock, at the option of
the holder, upon the closing of the Company's initial public offering at a
rate equal to 75% of the value of a share of Common Stock in such public
offering and, unless so converted, is to be redeemed by the Company (at the
original purchase price plus accrued but unpaid dividends) upon the closing of
such offering. Such Series P Redeemable Preferred Stock will be redeemed by
the Company upon the closing of this Offering for an aggregate amount of
approximately $2.7 million.
In October 1991, pursuant to a Manufacturing Agreement (the "Manufacturing
Agreement"), the Company granted Ailicec International a right of first
refusal with respect to the manufacture and sale of products to the Company
through October 1998, with any payments due Ailicec International subject to a
security agreement. The Company purchased products from Ailicec International
under the Manufacturing Agreement in an aggregate amount of $913,000 during
the Company's fiscal year ended March 31, 1995 and none during the fiscal year
ended March 31, 1996 and the nine months ended December 31, 1996. In February
1997, the Manufacturing Agreement was amended to terminate upon the closing of
the Offering. Ailicec International is a principal stockholder of the Company.
Chung Chiu, a director of the Company, is the Managing Director of Ailicec
International.
The Company has entered into indemnification agreements with its directors
and executive officers. The Company has also entered into certain stock
purchase and subscription agreements with the Selling Stockholders pursuant to
which the Company will indemnify the Selling Stockholders for certain
liabilities and costs incurred in connection with this Offering and the
Selling Stockholders will indemnify the Company and its officers and directors
for certain liabilities incurred in connection with this Offering.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of the Company's Common Stock as of May 1, 1997
and as adjusted to reflect the sale of Common Stock offered hereby, for (i)
each person who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each of the Company's directors, (iii) each of the
Selling Stockholders, (iv) each Named Executive Officer and (v) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING (1) TO BE OFFERING (1)
----------------- SOLD IN -----------------
NAME AND ADDRESS (2) NUMBER PERCENT OFFERING NUMBER PERCENT
- -------------------- --------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Thomas B. Akin (3)................. 2,245,779 28.1% -- 2,245,779 20.9%
c/o Talkot Partners II, LLC
2400 Bridgeway, Suite 200
Sausalito, CA 94965
Talkot Partners II, LLC (4)........ 2,123,158 26.7 -- 2,123,158 19.9
2400 Bridgeway, Suite 200
Sausalito, CA 94965
Ailicec International Enterprises
Ltd. (5).......................... 918,732 11.0 -- 918,732 8.3
2nd Floor Kaiser Estate Phase 1 41
Man Yue Street
Hunghom, Kowloon Hong Kong
Chung Chiu (6)..................... 928,732 11.1 -- 928,732 8.4
c/o Ailicec International
Enterprises Ltd.
2nd Floor Kaiser Estate Phase 141
Man Yue Street
Hunghom, Kowloon Hong Kong
Poly Ventures II, Limited
Partnership (7)................... 492,474 6.2 125,000 367,474 3.4
c/o Polytechnic University Office
901 Route 110
Farmingdale, NY 11735
Shelley A. Harrison (8)............ 502,474 6.3 125,000 377,474 3.5
c/o Polytechnic University Office
901 Route 110
Farmingdale, NY 11735
Rudy Prince (9).................... 396,666 5.0 50,000 346,666 3.2
Steven J. Carnevale (10)........... 334,022 4.1 -- 334,022 3.0
Lon B. Radin (11).................. 229,166 2.9 25,000 204,166 1.9
John H. Harris (12)................ 137,916 1.7 15,000 122,916 1.1
Douglas Y. Bech (13)............... 110,437 1.4 20,000 90,437 *
Edward R. Prince, Jr. (14)......... 98,833 1.2 7,500 91,333 *
Hansgregory C. Hartmann (15)....... 44,916 * -- 44,916 *
All directors and executive
officers as a group,
(12 persons) (16)................. 5,148,941 58.1 242,500 4,906,441 42.3
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING (1) TO BE OFFERING (1)
--------------- SOLD IN ---------------
NAME AND ADDRESS (2) NUMBER PERCENT OFFERING NUMBER PERCENT
- -------------------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS
Prism Partners (17)................... 378,451 4.8% 95,853 282,184 2.6%
Granite Capital LP (18)............... 206,556 2.6 52,467 154,014 1.4
Virginia Snyder....................... 200,000 2.5 25,000 175,000 1.6
Strome Family Living Trust (19)....... 145,212 1.8 36,870 108,275 1.0
Marshall Oman Exploration Inc......... 100,000 1.3 26,202 74,564 *
Alan M. Craft......................... 96,000 1.2 20,961 75,650 *
WSB Trust 10/12/82 FBO
Grandchildren (20)................... 90,043 1.1 23,097 67,138 *
Leo R. Schlinkert..................... 88,851 1.1 23,281 66,250 *
Antaeus Enterprises Inc............... 78,950 1.0 20,192 58,868 *
Other Selling Stockholders each owning
less than 1% of the Common Stock
before the Offering (46 parties)..... 766,494 9.6 183,440 583,054 5.5
</TABLE>
- --------
* Less than 1%.
(1) Percentage ownership is based on (i) before the Offering, 7,943,470
shares of Common Stock outstanding as of May 1, 1997 (reflects the
conversion of each of the outstanding shares of convertible preferred
stock, except the Series P Redeemable Preferred Stock, upon the closing
of the Offering, the issuance of 491,317 shares upon the automatic net
exercise in full of certain warrants upon the closing of the Offering the
issuance of 144,623 shares upon the conversion of cumulative unpaid
dividends on the Series F Convertible Preferred Stock upon the closing of
the Offering) plus any shares issuable pursuant to the options held by
the person or group in question which may be exercised within 60 days of
May 1, 1997; and (ii) after the Offering, an additional 2,750,000 shares
of Common Stock to be issued by the Company in the Offering.
(2) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock.
(3) Includes options and warrants to purchase an aggregate of 43,472 shares
of Common Stock exercisable within sixty days of May 1, 1997 and includes
2,123,158 shares of Common Stock held by Talkot Partners II, LLC. Mr.
Akin is a Managing General Partner of Talkot Partners II, LLC and
disclaims beneficial ownership of these shares except as to the pecuniary
interest that he will derive from these shares.
(4) Mr. Akin is a Managing General Partner of Talkot Partners II, LLC and
disclaims beneficial ownership of these shares except as to the pecuniary
interest he will derive from these shares.
(5) Excludes 344,350 shares of Series P Redeemable Preferred Stock to be
redeemed at the Closing and includes a warrant to purchase 388,500 shares
of Common Stock.
(6) Includes an option to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997 and also includes a warrant to purchase
388,500 shares of Common Stock and 530,232 shares of Common Stock held by
Ailicec International Enterprises, Ltd. Mr. Chiu is the Managing Director
of Ailicec International Enterprises, Ltd. and disclaims beneficial
ownership of these shares.
(7) Dr. Harrison is one of the general partners of Poly Ventures, Limited
Partnership, the General Partner of Poly Ventures II, Limited
Partnership. Dr. Harrison disclaims beneficial ownership of these shares
except as to the pecuniary interest he will derive from these shares.
55
<PAGE>
(8) Includes an option to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997 which is held by Dr. Harrison for the
benefit of Poly Ventures II, Limited Partnership, and 492,474 shares of
Common Stock held by Poly Ventures II, Limited Partnership. Dr. Harrison
is one of the general partners of Poly Ventures, Limited Partnership, the
General Partner of Poly Ventures II, Limited Partnership. Dr. Harrison
disclaims beneficial ownership of these shares except as to the pecuniary
interest he will derive from these shares.
(9) Includes options to purchase 29,166 shares of Common Stock exercisable
within sixty days of March 1, 1997.
(10) Includes options and warrants to purchase an aggregate of 270,265 shares
of Common Stock exercisable within sixty days of May 1, 1997 and includes
30,424 shares of Common Stock held by Mr. Carnevale's wife.
(11) Includes options to purchase 29,166 shares of Common Stock exercisable
within sixty days of May 1, 1997.
(12) Includes options to purchase 14,583 shares of Common Stock exercisable
within sixty days of May 1, 1997.
(13) Includes options to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997.
(14) Includes options to purchase 10,000 shares of Common Stock exercisable
within sixty days of May 1, 1997.
(15) Includes options to purchase 22,916 shares of Common Stock exercisable
within sixty days of May 1, 1997.
(16) Includes options and warrants in the aggregate of 913,068 shares of
Common Stock exercisable within sixty days of May 1, 1997.
(17) Jerald Weintraub is the Managing General Partner of Prism Partners.
(18) Walter F. Harrison III is the General Partner of Granite Capital LP.
(19) Mark Strome is the trustee of the Strome Family Living Trust.
(20) Sarah Beinecke Richardson, Joseph M. Santarella and William McIlwanie
Thompson, Jr. are the trustees of the WSB Trust 10/12/82 FBO
Grandchildren.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of the Offering, the authorized capital stock of the Company
will consist of 35,000,000 shares of Common Stock, $0.01 par value, and
5,000,000 shares of Preferred Stock, $0.01 par value, after giving effect to
the amendment of the Company's Certificate of Incorporation authorizing an
increase in the authorized number of shares of Common Stock to 35,000,000 and
a decrease in the authorized number of shares of Preferred Stock to 5,000,000,
and deleting references to Series A, Series B, Series C, Series D, Series E,
Series F Convertible Preferred Stock and Series P Redeemable Preferred Stock
following the conversion, or, with respect to the Series P Redeemable
Preferred Stock, the redemption, of such Preferred Stock (including the
automatic net exercise in full of certain warrants to purchase shares of
Common Stock upon the closing of the Offering and the conversion of cumulative
unpaid dividends on the Series F Convertible Preferred Stock upon the closing
of the Offering).
COMMON STOCK
As of May 1, 1997, there were 7,943,470 shares of Common Stock outstanding
(after giving effect to (i) the conversion, or, with respect to the Series P
Redeemable Preferred Stock, the redemption, of all Preferred Stock, (ii) the
issuance of shares of Common Stock upon the automatic net exercise in full of
certain warrants and (iii) the conversion of cumulative unpaid dividends on
the Series F Convertible Preferred Stock) held of record by 146 stockholders.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
liquidation rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are fully paid and non-
assessable, and the shares of Common Stock to be outstanding upon closing of
the Offering will be fully paid and non-assessable.
PREFERRED STOCK
As of the closing of the Offering, 5,000,000 shares of Preferred Stock will
be authorized and no shares will be outstanding. The Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of Preferred Stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. Although it
presently has no intention to do so, the Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 7,367,549 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of the respective Preferred Stock Purchase Agreements
and Subscription and Stock Purchase Agreements, the Series E Preferred Stock
Purchase Agreement, the Series F Preferred Stock Purchase Agreement, the Note
Purchase Agreement, Warrants and a Registration Rights Agreement. Upon
consummation of the Offering and subject to certain limitations in the
applicable agreements, holders of 5,817,904 shares of Registrable Securities
may request registration under the Securities Act of all or part of their
Registrable Securities, six months after the effective date of the Offering.
If the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of 6,414,215 shares of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. All registration expenses must
57
<PAGE>
be borne by the Company and all selling expenses relating to Registrable
Securities must be borne by the holders of the securities being registered. In
addition, certain holders of Registrable Securities may request registration
under the Securities Act of all or part of their Registrable Securities on
Form S-3 when use of such form becomes available to the Company.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of Delaware law and the Company's Restated Certificate of
Incorporation and Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest, or otherwise, and the
removal of incumbent officers and directors. These provisions are expected to
discourage certain types of coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of the
Company to first negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals
could result in an improvement of their terms.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years prior, did own) 15% or more of the corporation's voting
stock. The Company has waived the right to "elect out" of application of
Section 203.
The Company's Restated Certificate of Incorporation also provides that if at
any time the Company shall have a class of stock registered pursuant to the
Securities Exchange Act of 1934, as amended, for so long as such class is so
registered, stockholder action can be taken only at an annual or special
meeting of stockholders and may not be taken by written consent. The Bylaws
provide that special meetings of stockholders can be called only by the
Chairman of the Board, the President or the Board of Directors. Stockholders
are not permitted to call a special meeting or to require that the Board of
Directors call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting by the Chairman of the Board, the
President or the Board of Directors. The Bylaws set forth an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors and with
regard to business to be brought before an annual meeting of stockholders of
the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
10,693,470 shares of Common Stock, assuming no exercise of options or warrants
after December 31, 1996. Of these shares, the 3,500,000 shares offered hereby
(4,025,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration
under the Securities Act, unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act ("Rule 144")
described below. The remaining 7,185,148 shares of Common Stock outstanding
upon closing of the Offering are "restricted securities" as that term is
defined in Rule 144. Of the remaining 7,193,470 shares, 7,018,708 shares are
subject to lock-up agreements (described below).
Upon completion of the Offering, no shares will become eligible for
immediate sale pursuant to Rule 144(k) and, beginning 90 days after
commencement of the Offering, 7,130,517 shares will become eligible for sale
pursuant to Rule 144 or Rule 701 under the Securities Act ("Rule 701"). Upon
expiration of the lock-up agreements, an aggregate of 2,357,089 shares will
become immediately eligible for sale without restriction pursuant to Rule
144(k) or Rule 701 (described below), and approximately 4,773,428 additional
shares will be eligible for sale subject to the timing, volume, and manner of
sale restrictions of Rule 144. The 62,953 remaining shares held by existing
stockholders will become eligible for sale at various times over a period of
less than one year. In addition, 1,319,573 additional shares of Common Stock
subject to outstanding warrants and vested stock options could also be sold,
subject in some cases to compliance with certain volume limitations as
described below.
In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "brokers' transactions" or
to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater
of (i) one percent of the number of shares of Common Stock then outstanding
(approximately 106,935 shares immediately after the completion of the
Offering) or (ii) generally, the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form
144 with respect to such sale. Sales under Rule 144 are generally subject to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner other than an affiliate from whom such shares were
purchased), is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Under Rule 701, persons who purchase shares upon exercise of options
granted prior to the effective date of the Offering are entitled to sell such
shares 90 days after the effective date of the Offering in reliance on Rule
144, without having to comply with the holding period requirements of Rule 144
and, in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.
Pursuant to the lock-up agreements, all of the Company's officers and
directors and certain stockholders, including the Selling Stockholders, owning
upon completion of the Offering, in the aggregate, 7,018,708 shares of Common
Stock, have executed agreements pursuant to which each has agreed that they
will not, for a period of 180 days from the date of this Prospectus, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, pledge, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital
stock of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock, or other capital stock of the
Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters. In addition, certain other
stockholders of the Company holding an aggregate of 110,000 shares are subject
to 90 day lock-up agreements with the Company and stockholders holding an
aggregate of 63,762 shares are subject to 180 day lock-up agreements with the
Company. Further, holders of outstanding warrants and vested stock options
for, in the aggregate, an additional 1,319,573 shares of Common Stock are
subject to 180 day lock-up agreements with the Company and/or Prudential
59
<PAGE>
Securities Incorporated. The Company has agreed that it will not, for a period
of 180 days from the date of this Prospectus, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the
Company or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock, or other capital stock of the Company without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except that such agreement does not prevent the Company from
granting additional options under the 1995 Plan or the Director Plan or from
issuing shares under the Purchase Plan. Prudential Securities Incorporated may
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
Approximately 180 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering an aggregate of
approximately 4,233,910 shares of Common Stock (including the 1,160,635 shares
subject to outstanding options as of May 1, 1997) that have been reserved for
issuance under its stock option and stock purchase plans, thus permitting the
resale of such shares in the public market without restriction under the
Securities Act.
The holders of an aggregate of 7,367,549 shares of Common Stock (including
shares issuable upon exercise of outstanding warrants) or their transferees
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights of Certain Holders."
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market prices and impair the
Company's ability to raise capital through the sale of equity securities.
60
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated.................................
Cowen & Company....................................................
---------
Total........................................................... 3,500,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the initial public offering price set forth on the cover page of
this Prospectus; that the Underwriters may reallow to selected dealers a
concession of $ per share; and that such dealers may re-allow a concession
of $ per share to certain other dealers. After the initial public
offering, the offering price and the concessions may be changed by the
Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 525,000 additional shares
of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to
3,500,000.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Company, its officers and directors, the Selling Stockholders and
certain other beneficial owners of the Company's Common Stock and holders of
warrants or options to purchase Common Stock have agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital
stock or any securities convertible into or exercisable or exchangeable for
any shares of Common Stock or other capital stock of the Company, for a period
of 180 days after the date of this Prospectus without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters.
Prudential Securities Incorporated may in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-
up agreements.
61
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's financial and operating history
and condition, its prospects and the prospects for its industry in general,
the management of the Company and the market prices of securities for
companies in businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of
the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company and the Selling
Stockholders, and in such case may purchase Common Stock in the open market
following the closing of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 525,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, Prudential
Securities Incorporated, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by General Counsel Associates LLP,
Mountain View, California. Clifford S. Robbins, a partner of General Counsel
Associates LLP, owns 10,000 shares of the Common Stock of the Company. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
EXPERTS
The financial statements of JetFax, Inc. as of March 31, 1996 and December
31, 1996 and for the years ended March 31, 1995 and March 31, 1996 and for the
nine months ended December 31, 1996, appearing in this Prospectus and the
related financial statement schedule appearing elsewhere in this Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
62
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedule thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and to the exhibits and schedule filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission maintains a World
Wide Website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the website is http://www.sec.gov.
63
<PAGE>
JETFAX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficiency)............................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
JetFax, Inc.:
We have audited the accompanying balance sheets of JetFax, Inc. as of March
31, 1996 and as of December 31, 1996, and the related statements of
operations, stockholders' equity (deficiency) and cash flows for the years
ended March 31, 1995 and 1996 and for the nine-month period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of JetFax, Inc. at March 31, 1996 and
December 31, 1996, and the results of its operations and its cash flows for
the years ended March 31, 1995 and 1996 and for the nine-month period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
February 7, 1997
(March 18, 1997 as to Note 15)
F-2
<PAGE>
JETFAX, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1996 1997 1997
--------- ------------ --------- ---------
UNAUDITED
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 3,452 $ 106 $ 16 $ 16
Trade receivables, net of
allowances of: March 31, 1996,
$310; December 31, 1996, $396;
March 31, 1997, $383.............. 1,919 2,434 3,198 3,198
Receivable from the sale of the
Series F Preferred Stock.......... 650 -- -- --
Inventories........................ 3,387 2,339 3,241 3,241
Prepaid expenses................... 12 61 113 113
-------- -------- -------- --------
Total current assets............ 9,420 4,940 6,568 6,568
Property--net....................... 174 615 686 686
Other assets........................ 25 566 766 766
-------- -------- -------- --------
Total assets........................ $ 9,619 $ 6,121 $ 8,020 $ 8,020
======== ======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 4,169 $ 1,857 $ 3,023 $ 3,023
Accrued liabilities................ 1,410 619 638 638
Line of credit..................... -- 200 1,000 1,000
Current portion of long-term note
payable........................... -- 302 313 313
Related party notes payable and
advances--current portion......... 61 -- -- --
-------- -------- -------- --------
Total current liabilities....... 5,640 2,978 4,974 4,974
-------- -------- -------- --------
Long-term note payable less current
portion............................ -- 198 181 181
Redeemable preferred stock, $0.01
par value; 500,000 shares
authorized, none pro forma; shares
outstanding: March 31, 1996, none
(344,350 shares issuable); December
31, 1996, 344,350 shares; March 31,
1997 actual and pro forma 344,350
shares (liquidation preference of
$2,764)............................ 2,610 2,726 2,764 2,764
Stockholders' equity:
Convertible preferred stock, $0.01
par value; 9,000,000 shares
authorized, 5,000,000 shares pro
forma; shares outstanding: March
31, 1996, December 31, 1996 and
March 31, 1997, 6,293,978; March
31, 1997 pro forma, none
(liquidation preference of
$14,404).......................... 63 63 63 --
Common stock, $0.01 par value;
13,500,000 shares authorized,
35,000,000 shares pro forma;
shares outstanding: March 31,
1996, 954,474; December 31, 1996,
995,599; March 31, 1997,
1,013,552; March 31, 1997, pro
forma 7,943,470................... 9 10 10 79
Additional paid-in capital......... 13,160 13,880 14,670 14,664
Accumulated deficit................ (11,863) (13,734) (14,642) (14,642)
-------- -------- -------- --------
Total stockholders' equity...... 1,369 219 101 101
-------- -------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity............................. $ 9,619 $ 6,121 $ 8,020 $ 8,020
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
JETFAX, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTERS
YEARS ENDED NINE MONTHS ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31,
--------------- ------------------- --------------
1995 1996 1995 1996 1996 1997
------ ------- ----------- ------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $6,413 $11,143 $ 7,336 $10,205 $3,807 $4,250
Development fees....... 1,200 699 466 1,416 233 743
Software and technology
license fees.......... 139 1,345 667 1,241 678 223
------ ------- ------- ------- ------ ------
Total revenues...... 7,752 13,187 8,469 12,862 4,718 5,216
------ ------- ------- ------- ------ ------
Costs and expenses:
Cost of product
revenues.............. 5,249 11,102 7,793 8,495 3,309 2,979
Research and
development........... 1,118 1,249 919 1,709 330 1,477
Selling and marketing.. 1,325 2,710 1,745 2,785 965 972
General and
administrative........ 746 750 500 823 250 352
------ ------- ------- ------- ------ ------
Total costs and
expenses........... 8,438 15,811 10,957 13,812 4,854 5,780
------ ------- ------- ------- ------ ------
Loss from operations.... (686) (2,624) (2,488) (950) (136) (564)
Other income (expense):
Interest expense....... (70) (287) (200) (9) (87) (7)
Interest income........ 2 14 7 31 7 --
Other income (expense). -- 3 1 (9) 2 (20)
------ ------- ------- ------- ------ ------
(68) (270) (192) 13 (78) (27)
------ ------- ------- ------- ------ ------
Loss before
extraordinary item and
income taxes........... (754) (2,894) (2,680) (937) (214) (591)
Provision for income
taxes.................. -- 35 35 105 -- 45
------ ------- ------- ------- ------ ------
Loss before
extraordinary item..... (754) (2,929) (2,715) (1,042) (214) (636)
Extraordinary item--gain
on exchange of
stockholder debt and
receivables for notes
payable................ 349 -- -- -- -- --
------ ------- ------- ------- ------ ------
Net loss................ $ (405) $(2,929) $(2,715) (1,042) $ (214) (636)
====== ======= ======= ======
Series P Redeemable
Preferred Stock
dividends.............. (116) (38)
------- ------
Net loss applicable to
common stockholders.... $(1,158) $ (674)
======= ======
Pro forma net loss per
share.................. $ (0.14) $(0.08)
======= ======
Common and common
equivalent shares used
in computing pro forma
net loss per share .... 8,454 8,474
======= ======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
JETFAX, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1994. 2,848,288 $ 29 867,105 $ 9 $ 3,936 $ (8,432) $ (4,458)
Exercise of Common Stock
options................ -- -- 31,609 -- 4 -- 4
Net loss................ -- -- -- -- -- (405) (405)
--------- ---- --------- --- -------- --------- --------
Balances, March 31,
1995................... 2,848,288 29 898,714 9 3,940 (8,837) (4,859)
Exercise of Common Stock
options................ -- -- 55,760 -- 5 -- 5
Issuance of Series F
Convertible Preferred
Stock for cash of
$7,547 and conversion
of debt of $1,929, net
of issuance costs of
$675................... 3,445,690 34 -- -- 8,766 -- 8,800
Additional paid in
capital from conversion
of debt into Series P
Redeemable Preferred
Stock, net of issuance
costs of $13........... -- -- -- -- 379 -- 379
Cumulative dividends on
Series F Convertible
($70) and Series P
Redeemable ($27)
Preferred Stock........ -- -- -- -- 70 (97) (27)
Net loss................ -- -- -- -- -- (2,929) (2,929)
--------- ---- --------- --- -------- --------- --------
Balances, March 31,
1996................... 6,293,978 63 954,474 9 13,160 (11,863) 1,369
Exercise of Common Stock
options................ -- -- 41,125 1 7 -- 8
Cumulative dividends on
Series F Convertible
($713) and Series P
Redeemable ($116)
Preferred Stock........ -- -- -- -- 713 (829) (116)
Net loss................ -- -- -- -- -- (1,042) (1,042)
--------- ---- --------- --- -------- --------- --------
Balances, December 31,
1996................... 6,293,978 63 995,599 10 13,880 (13,734) 219
Exercise of Common Stock
options*............... -- -- 4,000 -- 1 -- 1
Exercise of Common Stock
warrant*............... -- -- 13,953 -- 30 -- 30
Cumulative dividends on
Series F Convertible
($234) and Series P
Redeemable ($38)
Preferred Stock*....... -- -- -- -- 234 (272) (38)
Warrant compensation
expense (Note 3)*...... -- -- -- -- 525 -- 525
Net loss*............... -- -- -- -- -- (636) (636)
--------- ---- --------- --- -------- --------- --------
Balances, March 31,
1997*.................. 6,293,978 $ 63 1,013,552 $10 $ 14,670 $ (14,642) $ 101
========= ==== ========= === ======== ========= ========
</TABLE>
* Unaudited
See notes to financial statements.
F-5
<PAGE>
JETFAX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED QUARTERS ENDED
MARCH 31, DECEMBER 31, MARCH 31,
---------------- ------------------- ---------------
1995 1996 1995 1996 1996 1997
------- ------- ----------- ------- ------- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (405) $(2,929) $(2,715) $(1,042) $ (214) $ (636)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization.......... 115 250 136 143 74 52
Warrant compensation
expense............... -- -- -- -- -- 525
Provision for
(reversal of)
inventory reserves
and purchase
commitment............ -- 760 760 (280) -- --
Extraordinary gain on
debt restructuring.... (349) -- -- -- -- --
Changes in assets and
liabilities:
Trade receivables..... (1,082) (392) 163 (515) (630) (764)
Inventories........... (644) (1,912) (1,671) 1,048 (441) (902)
Prepaid expenses...... -- (12) (4) (49) (8) (52)
Accounts payable...... 1,822 1,771 2,718 (2,312) (871) 1,166
Accrued liabilities... (400) 53 (49) (511) 56 19
------- ------- ------- ------- ------- ------
Net cash used for
operating
activities......... (943) (2,411) (463) (3,518) (2,034) (592)
------- ------- ------- ------- ------- ------
Cash flows from
investing activities:
Purchase of property... (217) (154) (85) (515) (30) (123)
Increase in other
assets................ (1) (10) (174) (55) 164 (200)
Acquisition of Crandell
Group................. -- -- -- (305) -- --
------- ------- ------- ------- ------- ------
Net cash used for
investing
activities......... (218) (164) (259) (875) 134 (323)
------- ------- ------- ------- ------- ------
Cash flows from
financing activities:
Proceeds from sale of
common stock.......... 4 5 5 8 -- 31
Repayment of notes
payable............... (5) (1,362) -- -- (1,175) (6)
Repayment of related
party notes payable... (609) (70) -- (61) -- --
Line of credit
borrowings, net....... -- -- -- 200 -- 800
Equipment term note
borrowings............ -- -- -- 250 -- --
Proceeds from issuance
of notes payable...... 1,990 1,010 800 -- -- --
Proceeds from Series F
Convertible Preferred
Stock--net............ -- 6,222 -- -- 6,222 --
Restricted investments. (100) 100 100 -- -- --
------- ------- ------- ------- ------- ------
Net cash provided by
financing
activities......... 1,280 5,905 905 1,047 5,047 825
------- ------- ------- ------- ------- ------
Increase (decrease) in
cash and cash
equivalents............ 119 3,330 183 (3,346) 3,147 (90)
Cash and cash
equivalents, beginning
of year................ 3 122 122 3,452 305 106
------- ------- ------- ------- ------- ------
Cash and cash
equivalents, end of
year................... $ 122 $ 3,452 $ 305 $ 106 3,452 16
======= ======= ======= ======= ======= ======
Supplemental cash flow
information:
Interest paid.......... $ 37 $ 211 $ 202 $ 9 9 7
======= ======= ======= ======= ======= ======
Taxes paid--foreign
withholding........... $ -- $ 35 $ 35 $ 105 -- 45
======= ======= ======= ======= ======= ======
Supplemental noncash
investing and financial
information:
Accounts receivable--
stockholder, offset
against accounts
payable--stockholder.. $ 1,141 $ 75
======= =======
Restructuring of
accounts payable--
stockholder, to long-
term debt--
stockholder........... $ 2,505
=======
Restructuring of
advances from
stockholder, to long-
term debt--
stockholder........... $ 1,730
=======
Conversion of note
payable to
stockholder, to Series
P Redeemable Preferred
Stock issuable........ $ 675 $ 2,287 $ 2,287
======= ======= =======
Conversion of
convertible notes
payable into Series F
Convertible Preferred
Stock................. $ 1,929 $ 1,929
======= =======
Receivable--Series F
Convertible Preferred
Stock................. $ 650 $ 650
======= =======
Cumulative dividends on
Series F Convertible
and Series P
Redeemable Preferred
Stock................. $ 97 $ 9 $ 829 $ 90 $ 272
======= ======= ======= ======= ======
Acquisition of Crandell
Group (Note 3):
Fair value of assets
acquired (includes
intangibles of $540
and property of $15).. $ 555
Cash paid.............. (305)
-------
Note payable to
seller................ $ 250
=======
</TABLE>
See notes to financial statements.
F-6
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
1.NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JetFax, Inc. (the Company) was incorporated in Delaware in August 1988 and
since that time has engaged in the development, manufacture and sale of its
branded multifunction products (MFPs) and entered into agreements with a
number of manufacturers (OEMs) of MFPs for the customization and integration
of the Company's embedded system technology and desktop software in several
OEM products.
FISCAL PERIOD END
Effective December 31, 1996, the Company changed its fiscal year end from
March 31 to a 52-53 week reporting year ending on the first Saturday on or
after December 31. The 40-week period from April 1, 1996 to January 4, 1997 is
referred to herein as the nine months ended December 31, 1996 and the 13-week
period from January 5, 1997 through April 5, 1997 is referred to as the
quarter ended March 31, 1997. For presentation purposes, the Company refers to
its reporting year ended January 4, 1997 and the quarter ended April 5, 1997
as ending on December 31, 1996 and March 31, 1997, respectively.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Such
estimates include the level of the allowance for potentially uncollectible
accounts receivable, reserves for inventories, accrued losses on purchase
commitments, accrued OEM licensing revenues, product development revenues
recognized on the percentage-of-completion basis, accrued warranty costs, and
a valuation allowance for net deferred tax assets.
The Company sells and licenses its products and technology primarily to end
users (through independent dealers) and OEMs in the United States, Canada,
Asia and Europe. In addition, the Company performs development services for
certain of its OEMs. The Company performs ongoing credit evaluations of its
customers' financial condition and limits its exposure to losses from bad
debts by limiting the amount of credit extended whenever deemed necessary and
generally does not require collateral.
The Company operates in a very dynamic industry. The Company believes that
changes in any of the following areas could have a negative impact on the
Company's future financial position and results of operation: the timing of
introductions of new products or product enhancements by the Company, its OEMs
and their competitors; initiation or termination of arrangements between the
Company and its existing and potential significant OEM customers or
distributors or dealers; the size and timing of and fluctuations in end user
demand for the Company's branded products and OEM products incorporating the
Company's technology; inventories of the Company's branded products or
products incorporating the Company's technology carried by the Company, its
distributors and dealers, its OEMs or the OEMs' distributors that exceed
current or projected end user demand; the phase-out or early termination of
the Company's branded products or OEM products incorporating the Company's
technology; the amount and timing of development agreements, one-time software
licensing transactions and recurring license fees; non-performance by the
Company, its supplier or its OEM customers pursuant to their plans and
agreements; seasonal trends; competition and pricing; customer order deferrals
and cancellations in anticipation of new products or product enhancements;
industry and technology developments; changes in the Company's operating
expenses; software and hardware defects; product delays or product quality
problems; currency fluctuations; and general economic conditions.
F-7
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
The Company recognized net losses of approximately $405,000, $2.9 million,
$1.0 million and $636,000 for the fiscal years ended March 31, 1995 and 1996,
the nine months ended December 31, 1996, and the quarters ended March 31,
1997, respectively. The Company's historical losses and $1.2 million of
preferred stock cumulative dividends through March 31, 1997 have resulted in
an accumulated deficit of approximately $14.6 million at March 31, 1997.
Management plans to enhance the Company's cash flows from operations by
obtaining license and development fees from OEMs, and increasing its product
sales; however, no assurance can be given that the Company will be successful
in such efforts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash equivalents and accounts receivable. Cash is
primarily on deposit at a financial institution. Credit risk with respect to
the trade receivables is spread over a number of geographically diverse
customers, who make up the Company's customer base. At December 31, 1996 and
March 31, 1997, one customer accounted for 12% and 14% of total accounts
receivable, respectively.
CASH EQUIVALENTS
Cash equivalents are highly liquid debt instruments acquired with an
original maturity of three months or less. The recorded carrying amounts of
the Company's cash and cash equivalents approximate their fair market value.
ACCOUNTS RECEIVABLE
Accounts receivable includes unbilled amounts of $364,000 and $611,000
relating to development revenues at December 31, 1996 and March 31, 1997,
respectively (see "Revenue Recognition" below).
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
The Company's products typically experience short life cycles, and the Company
estimates the market value of its inventory based on the anticipated selling
prices adjusted for completion and selling costs. Should the Company
experience a substantial unanticipated decline in the selling price of its
products and/or demand thereof, a material valuation adjustment and
corresponding charge to operations could result. In addition, the Company uses
subcontractors for the manufacture of certain of its products and/or
components and occasionally enters into purchase commitments for such
purchases. Consequently, the Company evaluates its exposure relative to such
contracts and the estimated selling prices of the related products, adjusted
for completion and selling costs, and accrues for losses, if anticipated (see
Note 6).
PROPERTY
Property is stated at cost or, for items under capital lease, at the present
value of future minimum lease payments at the lease inception. Depreciation
and amortization are computed using the straight-line method over estimated
useful lives of one to five years or the lease term, whichever is appropriate.
INCOME TAXES
The Company accounts for income taxes under an asset and liability approach.
Deferred tax liabilities are recognized for future taxable amounts and
deferred tax assets are recognized for future deductions net of a valuation
allowance to reduce deferred tax assets to amounts that are more likely than
not to be realized.
REVENUE RECOGNITION
Revenues from product sales are generally recognized upon shipment.
Estimated future warranty costs are accrued at the time of the sale.
F-8
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996 , NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996 AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997
(UNAUDITED)
The Company enters into development agreements with OEM customers for which
it receives development fees with certain payments contingent upon attaining
contract milestones. The Company generally retains ownership of the product
technology developed under the agreements; however, some agreements limit the
Company's ability to sell its products incorporating the technology. The
agreements typically provide for license and royalty payments to the Company
based on the OEM customers' subsequent use of the technology in their
products.
Revenues from product development agreements is recognized using the
percentage of completion method. Estimates are reviewed and revised
periodically throughout the lives of the contracts. Any revisions are recorded
in the accounting period in which the revisions are made. Royalties are
recognized as earned, and include OEM product licensing revenues which are
primarily determined based on the number of OEM units sold. Such revenues are
initially recorded based on an estimate of such number of units and are
adjusted upon the receipt of actual unit sales data from OEMs in the
accounting period in which the information is received.
RESEARCH AND DEVELOPMENT
Research and development costs include costs and expenses associated with
the design and development of new products. To the extent that such costs
include the development of computer software, the Company follows the working
model approach to determine technological feasibility of the software product.
Costs incurred subsequent to establishing technological feasibility have been
immaterial and, accordingly, all software development costs have been included
in research and development expense for the periods presented herein.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is based on the reported net loss adjusted for
cumulative dividends on Series P Redeemable Preferred Stock, to arrive at net
loss applicable to common stock. Pro forma net loss per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares include (i)
convertible preferred stock, except Series P Redeemable Preferred Stock,
(using the "if converted" method) and (ii) stock options and warrants (using
the treasury stock method). Common equivalent shares are excluded from the
computation if there is a net loss as their effect is anti-dilutive, except
that, pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletins and staff policy, such computations include all common and common
equivalent shares issued within the 12 months preceding the initial filing
date as if they were outstanding for all periods presented. In addition, all
outstanding preferred stock and cumulative dividends that convert into common
stock in connection with the proposed offering are included in the computation
as common equivalent shares even when the effect is anti-dilutive.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial information for the nine months ended
December 31, 1995 and for the quarters ended March 31, 1996 and 1997 have been
prepared on the same basis as the audited financial statements. In the opinion
of management, such unaudited information includes all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of this
interim information.
F-9
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
UNAUDITED PRO FORMA INFORMATION
Upon the closing of the initial public offering as contemplated by this
Prospectus (i) each of the outstanding shares of Series A through F
Convertible Preferred Stock will convert into one share of Common Stock,
(ii) 491,317 shares of Common Stock (assuming a public offering price of $9.00
per share) will be issued upon the net exercise of outstanding warrants to
purchase 661,193 shares of Common Stock (see Note 10), (iii) 144,623 shares of
Common Stock will be issued upon the conversion of cumulative dividends on
Series F Convertible Preferred Stock (see Note 10) and (iv) the authorized
number of shares of Preferred Stock and Common Stock will be 5,000,000 and
35,000,000, respectively (see Note 15). The unaudited pro forma information
included in the accompanying balance sheet gives effect to such conversions,
issuances and authorizations.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share."
SFAS 128 replaces the presentation of primary earnings per share (EPS) with a
presentation of basic EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. SFAS 128 also requires,
among other things, dual presentation of basic EPS and diluted EPS on the face
of the income statement for all entities with complex capital structures.
Assuming SFAS 128 had been adopted, basic and diluted EPS for the nine months
ended December 31, 1996 and the quarter ended March 31, 1997 would not have
differed significantly from the Company's reported pro forma net loss per
share.
2.SIGNIFICANT TRANSACTIONS
In August 1994, the Company entered into an agreement with a preferred
stockholder, who was also a supplier, which provided, among other things, that
the Company's receivable from the stockholder of $1,141,141 be applied to
reduce the amount due to the stockholder of $5,376,437. With respect to the
remainder due to the stockholder:
. $667,000 was converted to a note which was repaid during the fiscal
years ended March 31, 1996 and 1995. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," the note was recorded at
the amount of the future principal and interest payments of $684,164.
. $2,582,621 was converted to a 6% note with interest payable annually
with the principal due in five years. In accordance with SFAS No. 15,
the note was recorded at the amount of the future principal and interest
payments of $3,357,407. Upon the receipt of $400,000 of bridge
financing, which occurred in fiscal 1995, $675,000 of the note was
required to be converted into 90,000 shares of a new class of redeemable
preferred stock (Series P) at a conversion rate of $7.50 per share (see
Note 10). Accordingly, the note was reduced by $830,250 (including
$155,250 of related future interest recognized as additional
extraordinary gain). In March 1996, additional equity financing was
raised and, pursuant to the terms of the note, $1,907,621 of the face
value of the note was required to be converted into 254,350 shares of
redeemable preferred stock (Series P) at a conversion rate of $7.50 per
share. Accordingly, the note was reduced by its recorded amount of
$2,286,948 (including $379,327 of related future interest recognized as
additional paid in capital).
In accordance with SFAS No. 15, the above restructuring resulted in an
extraordinary gain of $348,975 in the year ended March 31, 1995. In addition,
a warrant to purchase 388,500 shares of Series E Convertible Preferred Stock
at a purchase price of $2.75 per share was issued to the stockholder. The
warrant is exercisable for five years. The estimated fair value of these
warrants is immaterial and, accordingly, no amount has been recorded in the
financial statements for their issuance.
F-10
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
3. BUSINESS COMBINATION
In July 1996, the Company acquired the assets of the Crandell Group, Inc.
(the Crandell Group), a company in the business of developing and marketing
software products, including certain products used in fax applications, some
of which have previously been licensed by and used in JetFax products. The two
principals of the Crandell Group (the Principals) have also entered into two
year employment agreements with JetFax. The primary terms of the acquisition,
which has been accounted for as a purchase transaction, are as follows:
. The Company paid $250,000 upon the closing, issued a non-interest
bearing promissory note for $250,000 that is due July 1997 and incurred
$55,000 of related acquisition costs for a total purchase price of
$555,000. $540,000 of the purchase price was allocated to proprietary
software, licensing contracts and covenants not to compete, and is being
amortized over five years. Accumulated amortization at December 31, 1996
is $54,302. The remaining $15,000 of the purchase price represents the
fair value of computer equipment and furniture acquired and has been
included in fixed assets.
. The Company is obligated to make monthly royalty payments to the
Crandell Group equal to 25% and 33% of revenues generated by sales of
products incorporating the acquired software technology (as defined
contractually) in the first and second twelve month periods after the
closing, respectively. These payments are contingent upon the continued
employment of the former majority shareholder/employee by the Company.
Accordingly, the Company has recorded $228,000 of such payments through
December 31, 1996 as compensation within research and development
expense.
. An amendment to the purchase agreement provides that upon an initial
public offering of the Company's stock (IPO) prior to July 31, 1998, the
Company's obligation to make further royalty payments in excess of those
already earned as of the end of the month prior to the month of the IPO,
will terminate. However, the Company will be obligated to make a payment
of $1,250,000 to the Principals within 60 days after the end of the
month in which the IPO takes place. If the IPO occurs after April 30,
1997, the $1,250,000 payment will be reduced by royalty amounts earned
by the Principals subsequent to April 30, 1997 and the $250,000 note
payable. The amount of the payment to the Crandell Group pursuant to
this provision (excluding the $250,000 note payable), if any, will be
accrued as compensation within research and development expense at the
time of the IPO.
The amendment to the purchase agreement also provides that the Principals
receive warrants to acquire a total of 100,000 shares of the Company's common
stock at an exercise price of $1.75 per share, the fair market value at the
time of the grant. These warrants will become exercisable only in the event of
an IPO prior to July 31, 1998. In addition, should the $1,250,000 payment be
reduced to zero pursuant to the provisions referred to above, the number of
the warrants that will be exercisable in the event of an IPO prior to July 31,
1998 will be decreased based on a formula that is designed to reduce the total
value of these warrants by the amount of the total payments paid to the
Principals under the terms of this agreement in excess of $1,250,000. As all
of the terms of these warrants will not be fixed until an IPO occurs, they are
accounted for as a variable equity award to employees for which increases in
the fair value of the Company's common stock subject to the warrants result in
additional compensation expense. Accordingly, the Company recognized $525,000
of compensation expense for the quarter ended March 31, 1997.
The results of operations for the Crandell Group prior to its acquisition by
the Company are not material and, accordingly, pro forma information is not
disclosed.
F-11
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
4.INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ---------
<S> <C> <C> <C>
Materials and supplies...................... $ 2,851 $ 1,276 $1,477
Work-in-process............................. 307 235 242
Finished goods.............................. 229 828 1,522
------- ------- ------
Total....................................... $ 3,387 $ 2,339 $3,241
======= ======= ======
5.PROPERTY
Property consists of (in thousands):
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ---------
<S> <C> <C> <C>
Furniture and fixtures...................... $ 568 $ 570 $ 668
Manufacturing tools and tooling............. 209 187 190
Software.................................... -- 341 363
Leasehold improvements...................... 56 56 56
------- ------- ------
Total....................................... 833 1,154 1,277
Accumulated depreciation and amortization... (659) (539) (591)
------- ------- ------
Property-net................................ $ 174 $ 615 $ 686
======= ======= ======
</TABLE>
6.ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ---------
<S> <C> <C> <C>
Compensation and related benefits........... $ 340 $ 220 $329
Product warranty............................ 147 140 172
Estimated loss on purchase commitment....... 649 -- --
Other....................................... 274 259 137
------- ------ ----
Total....................................... $ 1,410 $ 619 $638
======= ====== ====
</TABLE>
During the year ended March 31, 1996, the Company recorded an estimated loss
of $649,000 (charged to cost of product revenues) on a firm purchase
commitment with a supplier representing the estimated difference between the
product cost and the estimated selling price, adjusted for completion and
selling costs. In September 1996, the Company recorded a $280,000 recovery to
cost of product revenues of such amount based on the result of a negotiated
settlement.
F-12
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
7.LINE OF CREDIT AND NOTES PAYABLE
Line of credit and notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Line of credit........................................ $ 200 $1,000
===== ======
Equipment term loan................................... $2250 $ 244
Note payable.......................................... 250 250
----- ------
Total notes payable................................. 500 494
Current portion....................................... (302) (313)
----- ------
Long-term portion..................................... $ 198 $ 181
===== ======
</TABLE>
The Company has a line of credit agreement under which it may borrow up to
$1,500,000 at the bank's prime rate (8.25% at January 4, 1997) plus 1%.
Borrowings are limited to 75% on eligible domestic receivables, and secured by
all assets of the Company and are subordinate to shareholder notes and lien
positions. The line expires in August 1997.
The Company has $250,000 outstanding at December 31, 1996 under a $250,000
equipment term loan that expires in August 2000 and bears interest at the
bank's prime rate (8.25% at January 4, 1997) plus 1.50%. Interest is payable
in monthly installments during the six month draw period and principal
payments are to be amortized over 36 months plus interest payments. Borrowings
are secured by all assets of the Company and are subordinate to stockholder
notes and lien positions.
The line of credit and equipment term loan contain certain covenants which,
among other things, require the Company to maintain tangible net worth (as
defined) of $2,500,000, quarterly net income, a quick ratio of 0.8 to 1.0, a
maximum debt to net worth ratio (as defined) of 2.0 to 1.0 (1.5 to 1.0 after
December 31, 1996) and certain minimum liquidity and debt service coverage. In
addition, the agreement prohibits the payment of cash dividends. At December
31, 1996, the Company was not in compliance with the quarterly net income
covenant and subsequently received a waiver of this covenant through June 30,
1997 from the lender (see Note 15).
The Company has $250,000 outstanding at December 31, 1996 as part of the
payment associated with the acquisition of the Crandell Group. The note
expires July 31, 1997.
Future minimum payments for the notes payable at December 31, 1996 are:
1997, $302,000; 1998, $68,000; 1999, $75,000; and 2000, $55,000.
8.LEASE COMMITMENTS
The Company leases its primary facility under an operating lease expiring
through February 1998. Rent expense is recognized on a straight-line basis
over the term of the lease. The lease agreement requires the Company to pay
property taxes and maintenance costs. For the years ended March 31, 1995 and
1996 and the nine months ended December 31, 1996, rent expense was $147,500,
$149,900 and $146,122, respectively. Future minimum annual rental payments for
facilities leases are: 1997, $167,000 and 1998, $13,000.
F-13
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
9.REDEEMABLE PREFERRED STOCK
Pursuant to its August 1994 agreement with a preferred stockholder (see Note
2), the Company has 344,350 shares of Series P Redeemable Preferred Stock
(Series P) outstanding at December 31, 1996 and March 31, 1997. As discussed
in Note 2, 90,000 shares and 344,350 shares of the Series P were issuable at
March 31, 1995 and 1996, respectively. The Company received stockholder
approval for the Series P during October 1995 and completed the issuance of
the shares during March 1996.
The Series P is entitled to cumulative dividends of 6% per year and may be
redeemed by the Company anytime prior to an IPO or certain changes in control.
At the time of an IPO or such change in control, the Company is required to
redeem the outstanding Series P plus cumulative dividends up to the greater of
15% of the IPO or such change in control proceeds, or $1,125,000; unless the
stockholder elects to convert all or any part of the Series P into Common
Stock. Such conversion would occur at a conversion price equal to 75% of the
then fair value of the Common Stock. Accordingly, the Company has recorded
cumulative dividends of $27,000, $116,000 and $38,000 in the year ended March
31, 1996, the nine months ended December 31, 1996 and the quarter ended March
31, 1997, respectively (for an aggregate of $143,000 at December 31, 1996 and
$181,000 at March 31, 1997). The Series P has voting rights based on the
number of shares outstanding and JetFax is required to use 10% of its net
income, if any, in excess of $1,000,000 in any fiscal year to redeem the
Series P.
The Company has received notice from the Series P stockholder that it does
not intend to exercise its conversion rights and, accordingly, the Company
will be required to redeem the Series P from the proceeds of the offering
contemplated by the Prospectus.
10.STOCKHOLDERS' EQUITY
The Company has reserved or otherwise committed to issue shares of Common
Stock as follows (see Note 15):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Conversion of Convertible Preferred Stock
outstanding........................................ 6,293,978 6,293,978
Issuance under stock option plans................... 1,467,910 3,733,910
Exercise of Common Stock warrants................... 675,156 661,203
Employee stock purchase plan........................ -- 500,000
Other stock options................................. 401,999 401,999
Conversion of Series E Convertible Preferred Stock
issuable upon exercise of warrants (Note 2)........ 388,500 388,500
Conversion of Redeemable Preferred Stock (Note 9)... 344,350 344,350
Conversion of cumulative dividends on Series F
Convertible Preferred Stock........................ 115,833 144,623
Crandell Common Stock warrants (Note 3)............. 100,000 100,000
--------- ----------
Total............................................... 9,787,726 12,568,563
========= ==========
</TABLE>
CONVERTIBLE PREFERRED STOCK
In March 1996, certain convertible note holders and other investors
purchased 3,445,690 shares of Series F Preferred Stock in exchange for the
cancellation of convertible notes payable totaling $1,929,000 (including
$59,000 of related interest) and cash of $7,547,000 (of which $650,000
receivable at March 31, 1996 was
F-14
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
collected in April 1996). Warrants to purchase 675,156 shares of Common Stock
at $2.15 per share were issued to the convertible note holders (warrants to
purchase 661,203 shares of Common Stock were outstanding at March 31, 1997).
Such warrants are exercisable and expire from January 2000 through February
2001. The warrants are net exercised automatically upon the closing of an
initial public offering of the Company's Common Stock meeting specified
criteria. The net exercise is a cashless exercise whereby the number of shares
received is equal to the difference between the number of shares under the
warrant and the number of shares equal to the aggregate exercise price of the
warrant divided by the initial public offering price per share, net of
underwriting commissions. In connection with the Series F Convertible
Preferred Stock financing, the Company issued the investment banker an option
to purchase 401,999 shares of common stock at $1.72 per share. The option is
exercisable and expires in March 2004. The estimated fair values of the above
warrants and option are immaterial and, accordingly, no amounts have been
recorded in the financial statements.
Convertible preferred stock at December 31, 1996 and March 31, 1997 consists
of:
<TABLE>
<CAPTION>
LIQUIDATION PREFERENCE
------------------------
DECEMBER 31, MARCH 31,
DESIGNATED OUTSTANDING 1996 1997
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Series A........................ 1,000,000 750,996 $ 563,247 $ 563,247
Series B........................ 1,000,000 533,974 533,974 533,974
Series C........................ 600,000 564,834 706,043 706,043
Series D........................ 100,000 67,890 109,982 109,982
Series E........................ 2,500,000 930,594 2,000,777 2,000,777
Series F........................ 3,500,000 3,445,690 10,256,419 10,490,065
--------- --------- ----------- -----------
Total........................... 8,700,000 6,293,978 $14,170,442 $14,404,088
========= ========= =========== ===========
</TABLE>
Significant terms of the convertible preferred stock are as follows:
. Each share is convertible into one share of Common Stock (subject to
adjustments for events of dilution) and has the same voting rights as
Common Stock. Shares will automatically be converted upon a public
offering of common stock meeting specified criteria.
. A majority of each of the issued and outstanding Series A and F
Convertible Preferred Stock has the right to elect two directors,
respectively. A majority of the issued and outstanding Series E
Converible Preferred Stock and certain affiliates of Poly Ventures II,
Limited Partnership each have a right to elect one director,
respectively.
. Dividends are at the discretion of the Board of Directors and are
noncumulative for Series A through E Convertible Preferred Stock. Series
F Convertible Preferred Stock is entitled to a 10% annual, cumulative
dividend when declared by the Board, in preference to all other
Preferred and Common Stock. Dividends on Series F have preference over
cumulative dividends on Series P. No dividends have been declared. In
the event the Series F Convertible Preferred Stock is converted into
Common Stock as a result of a public offering or other event requiring
conversion prior to March 1998, any cumulative and unpaid dividends
thereon shall be converted into shares of Common Stock. The conversion
price is equal to 75% of the value of the Common Stock on the closing of
the event requiring the conversion of the Series F Convertible Preferred
Stock. The Company has recorded cumulative dividends of $70,000,
$713,000 and $234,000 in the fiscal year ended March 31, 1996, the nine
months ended December 31, 1996, and the quarter ended March 31, 1997,
respectively (for an aggregate of $783,000 at December 31, 1996 and $1.0
million at March 31, 1997).
F-15
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
. Shares may be redeemed at the option of the Board of Directors and with
the affirmative vote of 66.67% of the outstanding preferred
stockholders, for $1.13 per share of Series A, $1.50 per share of Series
B and Series C, $1.62 per share of Series D, and $2.15 per share of
Series E, plus all accrued but unpaid dividends.
STOCK OPTION PLAN
Under the Company's stock option plan, at December 31, 1996 options may be
granted to purchase a total of 1,400,000 shares of common stock at fair market
value as determined by the Board of Directors at the date of grant (see Note
15). At December 31, 1996 and March 31, 1997, 433,125 and 2,573,275 shares,
respectively, remain available for further option grants under the Company's
stock option plans (see Note 15). Terms for exercising options are determined
by the Board of Directors and options expire at the earlier of ten years and
one month or such shorter terms as may be provided in each stock option
agreement.
Stock option activity and balances are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance, April 1, 1994................................ 169,000 $0.14
Granted............................................... 82,519 0.20
Canceled.............................................. (38,000) 0.16
Exercised............................................. (31,609) 0.13
---------
Balance, March 31, 1995............................... 181,910 $0.16
Granted............................................... 31,000 0.20
Canceled.............................................. (27,500) 0.20
Exercised............................................. (55,760) 0.10
---------
Balance, March 31, 1996............................... 129,650 $0.19
Granted............................................... 1,009,000 0.55
Canceled.............................................. (62,740) 0.27
Exercised............................................. (41,125) 0.20
---------
Balance, December 31, 1996............................ 1,034,785 $0.54
Granted............................................... 148,100 5.92
Canceled.............................................. (18,250) 5.47
Exercised............................................. (4,000) 0.20
---------
Balance, March 31,1997................................ 1,160,635 $1.22
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ -----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
-------- -------------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.20 - $0.30 617,285 8.67 $0.29 94,507 $0.24
0.50 235,500 9.75 0.50 -- --
1.25 - 1.75 182,000 9.86 1.42 -- --
- ------------- --------- ---- ----- ------ -----
$0.20 - $1.75 1,034,785 9.13 $0.54 94,507 $0.24
============= ========= ==== ===== ====== =====
</TABLE>
F-16
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
The Company uses the intrinsic value method specified by Accounting
Principles Board Opinion No. 25 to calculate compensation expense associated
with issuing stock options and, accordingly, has recorded no such expense
through December 31, 1996 and March 31, 1997, respectively, as such issuances
have been at the fair value of the Company's common stock at the date of
grant.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended March 31, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-
Scholes option pricing model with the following weighted average assumptions:
expected life, 12 months following vesting; no stock volatility; risk free
interest rates, 6.29% for options granted during the nine months ended
December 31, 1996 and 6.02% for options granted during the year ended March
31, 1996; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values for the fiscal year
ended March 31, 1996 and for the nine months ended December 31, 1996 awards
had been amortized to expense over the vesting period of the awards, pro forma
net loss would not change for the year ended March 31, 1996 and would have
been $1,055,000 ($0.14 per share) for the nine months ended December 31, 1996.
However, the impact of outstanding non-vested stock options granted prior to
April 1, 1995 has been excluded from the pro forma calculation; accordingly,
the pro forma adjustments for the nine months ended December 31, 1996 and for
the year ended March 31, 1996 are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
11.INCOME TAXES
No federal and state income taxes were provided for the years ended March
31, 1995 and 1996, the nine months ended December 31, 1996 and the quarter
ended March 31, 1997 due to the Company's net losses. Foreign withholding
taxes of approximately $35,000, $105,000 and $45,000 were paid during the year
ended March 31, 1996, the nine months ended December 31, 1996 and the quarter
ended March 31, 1997, respectively. The Company's effective tax rate differs
from the federal statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED
--------------------- DECEMBER 31,
1995 1996 1996
---------- ----------- ------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate
of 35%................................... $ (264) $ (1,013) $(365)
Change in valuation allowance............. 264 1,013 365
Foreign withholding taxes................. -- 35 105
--------- ----------- ------
Total provision........................... $ -- $ 35 $ 105
========= =========== ======
</TABLE>
F-17
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss and tax credit carryforwards. Significant components of the Company's net
deferred income tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
<S> <C> <C> <C>
Deferred tax asset:
Net operating loss carryforwards................ $ 2,430 $ 2,290 $ 3,989
Tax credit carryforwards........................ 240 207 264
Accounts receivable allowances.................. 50 110 142
Depreciation.................................... -- 43 91
Inventory valuation............................. 43 177 78
Nondeducted expense accrual..................... -- 1,354 74
Warranty reserve................................ 69 42 40
Capitalized research and development............ -- 60 41
Vacation accrual................................ 23 19 37
Other........................................... 2 32 106
------- ------- -------
Total deferred tax assets........................ 2,857 4,334 4,862
Valuation allowance.............................. (2,857) (4,334) (4,862)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
As a result of the Company's history of operating losses, management
believes that the recognition of the deferred tax asset is considered less
likely than not. Accordingly, the Company has recorded a valuation allowance
of approximately $4.9 million against its net deferred tax assets.
At December 31, 1996, net operating loss carryforwards of approximately
$11.1 million and $6.3 million were available to offset future Federal and
state taxable income, respectively and research and development tax credits of
$108,000 and $156,000 were available to offset future Federal and state income
taxes, respectively. Current Federal and California tax law includes certain
provisions limiting the annual use of net operating loss carryforwards in the
event of certain defined changes in stock ownership. The annual use of the
Company's net operating loss carryforwards could be limited according to these
provisions. Management believes such limitation will not result in the loss of
carryforward benefits during the carryforward period; however, use of loss
carryforwards is dependent upon the Company's ability to achieve
profitability. These carryforwards expire from 2003 through 2011.
12.EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax deferred savings plan for all eligible
employees. Participants may contribute a percentage of their compensation,
which may be limited by the plan administrator or applicable tax laws. The
Company may make discretionary matching contributions. Such matching
contributions were immaterial for the years ended March 31, 1995 and 1996 and
the nine months ended December 31, 1996.
F-18
<PAGE>
JETFAX, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED MARCH 31, 1995 AND 1996, NINE MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED) AND 1996
AND QUARTERS ENDED MARCH 31, 1996 (UNAUDITED) AND 1997 (UNAUDITED)
13.CUSTOMER AND GEOGRAPHIC INFORMATION
Two customers accounted for 21% and 10%, respectively, of total revenues for
the nine months ended December 31, 1996, one customer accounted for 13% and
two customers accounted for 11% each of total revenues for the year ended
March 31, 1996 and one customer accounted for 17% of total revenues for the
year ended March 31, 1995. The following is a summary of revenues by
geographic region (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
1996 1996
---------- -----------------
<S> <C> <C>
United States................................... $ 8,031 $ 9,466
Europe.......................................... 3,885 1,808
Asia............................................ 839 1,311
Other........................................... 432 277
------- -------
Total........................................... $13,187 $12,862
======= =======
</TABLE>
International revenues, principally from Europe, were $1,683,000 for the
year ended March 31, 1995.
14. RELATED PARTY TRANSACTIONS
Related party transactions and balances not otherwise disclosed herein were
as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------- DECEMBER 31,
1995 1996 1996
---- ---- ------------
<S> <C> <C> <C>
Sales to related party................................ $215 $225 $ 63
Purchases from related party.......................... 913 -- --
Accounts payable...................................... 85 14 --
6% note payable to an officer of the Company.......... 61 61 --
</TABLE>
The Company has also granted a stockholder a nonexclusive royalty free
license to utilize certain of its intellectual property.
15.SUBSEQUENT EVENTS
On February 19, 1997, the Board of Directors adopted the following
resolutions which were subsequently approved by the stockholders:
. The 1997 Employee Stock Purchase Plan and reserved 500,000 shares of
Common Stock for sale to employees at 85% of the lower of fair market
value of the Common Stock at the beginning of the six-month offering
period or the end of each six-month purchase period.
. An increase in the number of shares of Common Stock reserved for the
grant of options by 2,000,000 shares to 3,400,000 shares.
. An amendment to the Company's Certificate of Incorporation to be
effective upon the closing of the Company's anticipated initial public
offering of its Common Stock authorizing a class of Preferred Stock
consisting of 5,000,000 shares and authorizing an increase in the
authorized number of shares of common stock to 35,000,000.
On March 11, 1997, the Company received a waiver of the quarterly net income
covenant in its bank line of credit through June 30, 1997.
On March 18, 1997, the Board of Directors approved the 1997 Director Option
Plan and reserved 270,000 shares of common stock for grants of options to
nonemployee directors to purchase Common Stock of fair market value as of the
grant date. The resolution was subsequently approved by the stockholders.
F-19
<PAGE>
GLOSSARY
In this Prospectus, the following terms have the meanings indicated below,
unless the context otherwise requires:
Proprietary ASIC: A custom-designed "proprietary" semiconductor chip which
performs specific hardware functions for the intended application of the chip.
Firmware: Programming instructions that are stored in a read-only memory
unit and typically responding on a real-time basis.
Controller: A printed circuit board containing all of the circuitry, ASICs
and embedded systems software necessary to enable a device to interpret and
execute instructions for the operation of the device.
Modular controller circuit board: A controller circuit board design in which
the software programs that control the device are organized into modules,
which may operate independently or jointly.
Embedded system: A controller circuit board on which proprietary ASICs,
software and firmware reside.
Integrated embedded system technology: A combination of proprietary ASICs,
software and firmware that reside together on a controller circuit board and
perform a number of functions in one design.
ASIC: Application specific integrated circuit.
DMA: Direct memory access.
OCR: Optical character recognition.
PCL: Printer control language.
G-1
<PAGE>
[LEFT SIDE OF PAGE:]
FAMILY OF AWARD WINNING PRODUCTS
[Pictures of the awards mentioned in the body text.]
JETFAX M5
PICK OF THE YEAR
BUYER'S LABORATORY (1996)
- -------------------------
JETFAX M5/M5 SST
EDITOR'S CHOICE '96
PREMIUM LASER FAX
BETTER BUYS FOR BUSINESS (1996)
- -------------------------------
JETFAX M5
TOP RATED "SEHR GUT" AWARD
FACTS MAGAZINE (1996)
- ---------------------
JETFAX M5
WIN 100 AWARD/HARDWARE
WINDOWS MAGAZINE (1996)
- -----------------------
JETFAX 4
TOP RATED "SEHR GUT" AWARD
FACTS MAGAZINE (1996)
- ---------------------
JETFAX 8000-D
PICK OF THE YEAR
BUYER'S LABORATORY (1993)
- -------------------------
JETFAX 8000-D
AWARD OF MERIT
BYTE MAGAZINE (1992)
- --------------------
[RIGHT SIDE OF PAGE:]
[JETFAX LOGO]
[Picture of JetFax M5]
JETFAX M5
JetFax's most recent product, JetFax M5
---------
is a high-volume multifunction product
with plain paper print, fax, copy
and scan capabilities.
The JetFax M5 also enables simultaneous sending
- -------------
and receiving of faxes with its two-line upgrade
or faster transmission with a 33.6 Kbps modem upgrade.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 32
Management................................................................ 44
Certain Transactions...................................................... 52
Principal and Selling Stockholders........................................ 54
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 61
Legal Matters............................................................. 62
Experts................................................................... 62
Additional Information.................................................... 63
Index to Financial Statements............................................. F-1
Glossary.................................................................. G-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 Shares
[LOGO OF JETFAX]
Common Stock
---------------
PROSPECTUS
---------------
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
June , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
Common Stock being registered. All amounts are estimates, except the SEC
registration fee and the NASD filing fee, and are payable by the Company.
<TABLE>
<S> <C>
SEC registration fee................................................. $ 12,197
NASD filing fee...................................................... 4,525
Nasdaq National Market listing fee................................... 44,205
Printing and engraving costs......................................... 150,000
Legal fees and expenses.............................................. 300,000
Accounting fees and expenses......................................... 175,000
Blue Sky fees and expenses........................................... 10,000
Transfer Agent and Registrar fees.................................... 3,500
Miscellaneous expenses............................................... 100,573
---------
Total.............................................................. $ 800,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933 (the "Securities Act").
Article XII of the Registrant's Restated Certificate of Incorporation (Exhibit
3.15 hereto) and Article VI of the Registrant's Amended and Restated Bylaws
(Exhibit 3.17 hereto) provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, the Registrant has entered into
Indemnification Agreements (Exhibit 10.1 hereto) with its officers and
directors. Reference is also made to Section 10 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, which provides for the indemnification of
officers, directors and controlling persons of the Registrant against certain
liabilities. Stock purchase and subscription agreements containing
registration rights provisions (Exhibits 10.8 to 10.25, 10.28 and 10.29
hereto) entered into by the Registrant and certain holders (the "Holders") of
its Common Stock (including certain of the Selling Stockholders), provide for
cross-indemnification of the Holders and the Registrant, its officers and
directors for certain liabilities arising under the Securities Act or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 1, 1994, the Registrant has issued and sold the following
unregistered securities:
1. Since March 1994, the Registrant issued options to purchase an aggregate
of 1,122,019 shares of its Common Stock under the Registrant's 1989
Stock Option Plan and 1995 Stock Plan, 133,494 shares of which have been
exercised at a purchase price of $0.20 per share.
2. Between August 1994 and August 1995, the Registrant issued an aggregate
of $2,999,999 of its 10% senior secured notes (the "Bridge Notes") and
warrants to purchase an aggregate of 675,156 shares of Common Stock at
an exercise price of $2.15 per share (the "Bridge Warrants") to Thomas
and Karen Akin, Abdulwahab Al-Qatami, Kenneth Alpart, Antaeus
Enterprises, Inc., William Beinecke, Paul W. Cargoes, Cook Investors
Limited Partnership, John and Patricia Cook, Paul Distefano, Draper
Associates Limited Partnership, Polly C. Draper, Rebecca Draper, Timothy
Draper, David Evans, Jeffrey S. Gilmore, Dorothy G. Gorman, Granite
Capital, L.P., Laurence M. Haar, James Herrell, Lambert Family Trust,
Paul G. Lego, Fred and Nancy Lovell, Robert G. Lundgren, Dalton W.
Martin,
II-1
<PAGE>
Charles C. McLeod, Jr., Janet Orttung-Morrow Family Trust, Evelyn
Morrow, Newman Family 1990 Revocable Trust u/a dated 5/30/90, Robert L.
Newman and Jan Newman, Trustees, Curtis J. Pabst, Katherine Pennell,
Scott P. Peters, Poly Ventures II, Limited Partnership, John P.
Rosenthal, Saratoga Springs Co., Ltd., Dennis M. Schaney, Shartsis,
Friese and Ginsburg, Irwin W. Silverburg, Strome Family Trust and
Traslader SA.
3. In October 1994, the Registrant issued 90,000 shares of its Series P
Redeemable Preferred Stock to Ailicec International Enterprises Limited
at a purchase price of $7.50 per share pursuant to the conversion of
$675,000 in debt.
4. In December 1994, the Registrant issued a warrant to purchase 388,500
shares of its Series E Convertible Preferred Stock to Ailicec
International Enterprises Limited at an exercise price of $2.75 per
share.
5. In March 1996, the Registrant issued an aggregate of 3,445,690 shares of
its Series F Convertible Preferred Stock at a purchase price of $2.75
per share for an aggregate consideration of $9,475,647.50 which
consisted of conversion of Bridge Notes and interest thereon in the
amount of $1,928,768.50 and cash in the aggregate amount of $7,546,879
to Abdulwahab Al-Qatami, Kenneth Alpart, Antaeus Enterprises, Inc.,
Douglas Y. Bech, William Beinecke, Craig Bere, Cook Investors Limited
Partnership, John and Patricia Cook, Draper Associates, L.P., Polly C.
Draper, David A. Evans, Kevin Flaherty, Jeffrey S. Gilmore, Dorothy G.
Gorman, Granite Capital, L.P., Jean Guex-Crosier, Laurence M. Haar,
Lawrence B. and Rebekah Helzel Living Trust, James G. Herrell, David
Kirshman, Lambert Family Trust, Paul G. Lego, Dalton W. Martin, Marwit
Capital Company, L.P., Janet Orttung-Morrow Family Trust, Newman Family
1990 Revocable Trust u/a dated 5/30/90, Robert L. Newman and Jan Newman,
Trustees, Katherine Pennell, Poly Ventures II, Limited Partnership,
Mindy Printz-Kopelson, Prism Partners I, Rebecca S. Draper Living Trust,
Lawrence H. Rose, John P. Rosenthal, Martin Rosman, Saratoga Springs
Co., Ltd., Irwin W. Silverberg, Strome Family Trust, Jeffrey and Janis
Susskind, Trustees FBO The Susskind Family Trust U/A/D 10/27/93, Victor
Szanto MD, Talkot Partners II, LLC, Timothy Draper Living Trust,
Traslader SA and Michael D. Waresh.
6. In March 1996, the Registrant issued 254,350 shares of its Series P
Redeemable Preferred Stock to Ailicec International Enterprises Limited
at a purchase price of $7.50 per share pursuant to the conversion of
$1,907,621 of debt.
7. As of March 1996, the Registrant granted options to purchase an
aggregate of 401,999 shares of its Common Stock to Steven J. Carnevale,
certain affiliates of Endeavor Capital Management and Thomas B. Akin
with an exercise price of $1.72 price per share as a finders fee with
respect to the Series F Convertible Preferred Stock financing.
8. In July 1996, the Registrant issued a promissory note in the amount of
$250,000 to the Crandell Group, Inc. as part of the payment for the
acquisition of substantially all of the assets of the Crandell Group,
Inc.
9. In December 1996, the Registrant issued warrants to purchase an
aggregate of 100,000 shares of its Common Stock to Michael Crandell and
Larry Crandell at a purchase price of $1.75 per share.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section
3(b) of the Securities Act, as transactions by an issuer not involving a
public offering or transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access, through their relationships with the
Company, to information about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Underwriting Agreement (draft of May 7, 1997).
3.1** Certificate of Incorporation of Registrant filed on August 3, 1988, as
currently in effect.
3.2** Certificate of Amendment of Certificate of Incorporation, as filed on
October 31, 1990.
3.3** Certificate of Amendment of Certificate of Incorporation, as filed on
August 13, 1991.
3.4** Certificate of Amendment of Certificate of Incorporation, filed on
February 12, 1996.
3.5** Certificate of Amendment of Certificate of Incorporation filed on
February 12, 1996.
3.6** Certificate of Amendment of Certificate of Incorporation filed on
November 4, 1996.
3.7** Amended Certificate of Designation of Series A Preferred Stock, as
currently in effect.
3.8** Certificate of Designation of Series B Preferred Stock, as currently
in effect.
3.9** Certificate of Designation of Series C Preferred Stock, as currently
in effect.
3.10** Certificate of Designation of Series D Preferred Stock, as currently
in effect.
3.11** Certificate of Designation of Series E Preferred Stock, as currently
in effect.
3.12** Amended Certificate of Designation of Series E Preferred Stock, as
currently in effect.
3.13** Certificate of Designation of Series P Preferred Stock, as currently
in effect.
3.14** Certificate of Designation of Series F Preferred Stock, as currently
in effect.
3.15** Form of Restated Certificate of Incorporation of Registrant to be
filed upon the closing of the Offering made under this Registration
Statement.
3.16** Amended and Restated Bylaws of Registrant, as currently in effect.
3.17** Form of Amended and Restated Bylaws to be adopted effective as of the
closing of the Offering made under this Registration Statement.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of General Counsel Associates LLP.
10.1** Form of Indemnification Agreement between Registrant and each of its
directors and officers.
10.2** 1989 Stock Option Plan, as amended and restated, and forms of Stock
Option Agreements thereunder.
10.3** 1995 Stock Plan, as amended and restated, and form of Stock Option
Agreement thereunder.
10.4** 1997 Director Stock Option Plan and form of Stock Option Agreement
thereunder.
10.5** 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
10.6** Lease Agreement dated December 1, 1992 between Registrant and Lincoln
Menlo Phase I Associates Limited for Menlo Park, California office.
10.7** Lease dated December 18, 1991 between Crandell Development Corporation
and Robert S. Grant for Santa Barbara, California office.
10.8** Registration Rights Agreement dated March 5, 1997 by and among the
Registrant and Rudy Prince, Lon B. Radin and Virginia Snyder.
10.9** Stock and Warrant Purchase Agreement dated as of August 31, 1988 by
and among Registrant and purchasers of 299,995 shares of Series A
Preferred, as amended February 1994.
10.10** Preferred Stock Purchase Agreement dated as of December 16, 1988 by
and among Registrant and purchasers of 336,000 shares of Series A
Preferred, as amended February 1994.
10.11** Preferred Stock Purchase Agreement dated as of June 22, 1989 by and
between Registrant and David A. Brewer.
10.12** Form of Subscription and Stock Purchase Agreement dated January 1991
by and between Registrant and certain purchasers of Series A Preferred
Stock.
10.13** Form of Subscription and Stock Purchase Agreement dated July 1989 by
and between Registrant and certain purchasers of shares of Series B
Preferred Stock.
10.14** Form of Subscription and Stock Purchase Agreement dated December 1989
by and between Registrant and certain purchasers of shares of Series B
Preferred Stock.
10.15** Form of Subscription and Stock Purchase Agreement dated
August/September 1990 by and between Registrant and certain purchasers
of shares of Series C Preferred Stock.
10.16** Subscription and Stock Purchase Agreement for the purchase of shares
of Series C Preferred Stock dated September 6, 1990 by and between
Registrant and Draper Associates Polaris Fund.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.17** Subscription and Stock Purchase Agreement dated September 7, 1990 by
and between Registrant and Adlar Turnkey Manufacturing Corporation.
10.18** Form of Subscription and Stock Purchase Agreement for shares of
Series D and Series E Preferred Stock and Warrants dated July 1991 by
and between Registrant and certain purchasers of shares of Series D
and Series E Preferred Stock.
10.19** Series E Preferred Stock Purchase Agreement dated August 18, 1991, as
amended as of January 30, 1996, by and between Registrant and Ailicec
California Corporation.
10.20** Series F Preferred Stock Purchase Agreement dated as of March 5, 1996
by and between Registrant and purchasers of Series F Preferred Stock.
10.21** Purchase and Debt Restructuring Agreement dated as of August 3, 1994
by and between Registrant and Ailicec International Enterprises
Limited.
10.22** Note Purchase Agreement dated August 3, 1994 by and between
Registrant and certain purchasers of notes and warrants for the
purchase of Common Stock.
10.23** Warrant to Purchase Stock dated December 31, 1994 by and between
Registrant and Ailicec International Enterprises Limited.
10.24** Common Stock Purchase Warrant dated December 16, 1996, and an
amendment thereto dated February 13, 1997, by and between Registrant
and Michael Crandell.
10.25** Common Stock Purchase Warrant dated December 16, 1996, and an
amendment thereto dated February 13, 1997, by and between Registrant
and Larry Crandell.
10.26** Asset Purchase Agreement dated July 31, 1996, as amended December 16,
1996, by and between Registrant and the Crandell Group, Inc.
10.27**+ Development Agreement dated September 25, 1991 and amended as of
February 12, 1997 by and between Registrant and Ailicec International
Enterprises Limited.
10.28** Common Stock Purchase Option dated as of March 29, 1996 by and
between Registrant and Steven J. Carnevale.
10.29** Common Stock Purchase Option dated as of March 29, 1996 by and
between Registrant and Thomas B. Aikin.
10.30** Promissory Note to Lon B. Radin dated March 1, 1992 from Registrant.
10.31**+ Development and Supply Agreement dated June 30, 1995 by and between
Registrant and Samsung Electronics Corporation.
10.32**+ Software License Agreement dated September 30, 1996 by and between
Registrant and Oki Data Corporation.
10.33**+ Supply and License Agreement dated November 1, 1996 by and between
Registrant and Pixel Magic, Inc.
10.34**+ Facsimile Product Development Agreement dated June 9, 1994 by and
between Registrant and Xerox Corporation.
10.35**+ Facsimile Product Development Agreement dated November 23, 1994 by
and between Registrant and Xerox Corporation.
10.36**+ Master Development, Purchase and Distribution License Agreement dated
effective as of January 31, 1997 by and between Registrant and
Hewlett-Packard Company.
10.37** Employment Agreement dated July 31, 1996 between Registrant and
Michael Crandell.
10.38** Security Agreement dated July 31, 1996 by and between Registrant and
the Crandell Group, Inc.
10.39**+ OEM Purchase Agreement dated February 22, 1995, as amended February
21, 1997, by and between Registrant and Oki America, Inc.
10.40 Loan and Security Agreement dated August 23, 1996 by and between
Registrant and Cupertino National Bank & Trust and the amendment
thereto dated March 11, 1997 and the amendment thereto dated March
31, 1997.
10.41** Form of Dealer Agreement.
10.42+ Agreement dated November 30, 1994 by and between the Crandell Group,
Inc. and Intel Corporation as amended May 11, 1995, assigned and
delegated to Registrant as of July 30, 1996 and as further amended
December 23, 1996.
11.1 Calculation of loss per share.
23.1 Independent Auditors' Consent and Report on Schedule (see page S-1).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-6).
27.1** Financial Data Schedule.
</TABLE>
- --------
**Previously filed.
+ Confidential treatment requested.
II-4
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts (see page S-2)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Menlo Park, State
of California, on the 12th day of May, 1997.
JetFax, Inc.
By /s/ Edward R. Prince, III
----------------------------------
EDWARD R. PRINCE, III, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Edward R. Prince, III President, Chief May 12, 1997
- ------------------------------------- Executive Officer
(EDWARD R. PRINCE, III) and Chairman of the
Board (Principal
Executive Officer)
/s/ Allen K. Jones Vice President of May 12, 1997
- ------------------------------------- Finance, Chief
(ALLEN K. JONES) Financial Officer,
and Secretary
(Principal
Financial and
Accounting Officer)
/s/ Thomas B. Akin Director May 12, 1997
- -------------------------------------
(THOMAS B. AKIN)
/s/ Douglas Y. Bech Director May 12, 1997
- -------------------------------------
(DOUGLAS Y. BECH)
/s/ Steven J. Carnevale Director May 12, 1997
- -------------------------------------
(STEVEN J. CARNEVALE)
/s/ Chung Chiu Director May 12, 1997
- -------------------------------------
(CHUNG CHIU)
/s/ Shelley Harrison Director May 12, 1997
- -------------------------------------
(SHELLEY HARRISON)
/s/ Edward R. Prince, Jr. Director May 12, 1997
- -------------------------------------
(EDWARD R. PRINCE, JR.)
/s/ Lon B. Radin Director May 12, 1997
- -------------------------------------
(LON B. RADIN)
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
JetFax, Inc.:
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-23763 of JetFax, Inc. on Form S-1 of our report dated February 7, 1997
(March 18, 1997 as to Note 15), appearing in the Prospectus, which is a part
of this Registration Statement, and to the references to us under the headings
"Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of JetFax, Inc., listed
in Item 16(b). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
San Jose, California
May 12, 1997
S-1
<PAGE>
SCHEDULE II
JETFAX, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND DEDUCTION/ END OF
PERIOD EXPENSES WRITE-OFF PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1995:
Accounts receivable allowance.. $252 $(119) $ (8) $125
YEAR ENDED MARCH 31, 1996:
Accounts receivable allowance.. 125 187 (2) 310
Accrued loss on inventory
purchase commitment........... -- 760 (111) 649
NINE MONTHS ENDED DECEMBER 31,
1996:
Accounts receivable allowance.. 310 106 (20) 396
Accrued loss on inventory
purchase commitment........... 649 (280) (369) --
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1 Underwriting Agreement (draft of May 7, 1997).
3.1** Certificate of Incorporation of Registrant filed on
August 3, 1988, as currently in effect.
3.2** Certificate of Amendment of Certificate of
Incorporation, as filed on October 31, 1990.
3.3** Certificate of Amendment of Certificate of
Incorporation, as filed on August 13, 1991.
3.4** Certificate of Amendment of Certificate of
Incorporation, filed on February 12, 1996.
3.5** Certificate of Amendment of Certificate of
Incorporation filed on February 12, 1996.
3.6** Certificate of Amendment of Certificate of
Incorporation filed on November 4, 1996.
3.7** Amended Certificate of Designation of Series A
Preferred Stock, as currently in effect.
3.8** Certificate of Designation of Series B Preferred
Stock, as currently in effect.
3.9** Certificate of Designation of Series C Preferred
Stock, as currently in effect.
3.10** Certificate of Designation of Series D Preferred
Stock, as currently in effect.
3.11** Certificate of Designation of Series E Preferred
Stock, as currently in effect.
3.12** Amended Certificate of Designation of Series E
Preferred Stock, as currently in effect.
3.13** Certificate of Designation of Series P Preferred
Stock, as currently in effect.
3.14** Certificate of Designation of Series F Preferred
Stock, as currently in effect.
3.15** Form of Restated Certificate of Incorporation of
Registrant to be filed upon the closing of the
Offering made under this Registration Statement.
3.16** Amended and Restated Bylaws of Registrant, as
currently in effect.
3.17** Form of Amended and Restated Bylaws to be adopted
effective as of the closing of the Offering made under
this Registration Statement.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of General Counsel Associates LLP.
10.1** Form of Indemnification Agreement between Registrant
and each of its directors and officers.
10.2** 1989 Stock Option Plan, as amended and restated, and
forms of Stock Option Agreements thereunder.
10.3** 1995 Stock Plan, as amended and restated, and form of
Stock Option Agreement thereunder.
10.4** 1997 Director Stock Option Plan and form of Stock
Option Agreement thereunder.
10.5** 1997 Employee Stock Purchase Plan and forms of
agreements thereunder.
10.6** Lease Agreement dated December 1, 1992 between
Registrant and Lincoln Menlo Phase I Associates
Limited for Menlo Park, California office.
10.7** Lease dated December 18, 1991 between Crandell
Development Corporation and Robert S. Grant for Santa
Barbara, California office.
10.8** Registration Rights Agreement dated March 5, 1997 by
and among the Registrant and Rudy Prince, Lon B. Radin
and Virginia Snyder.
10.9** Stock and Warrant Purchase Agreement dated as of
August 31, 1988 by and among Registrant and purchasers
of 299,995 shares of Series A Preferred, as amended
February 1994.
10.10** Preferred Stock Purchase Agreement dated as of
December 16, 1988 by and among Registrant and
purchasers of 336,000 shares of Series A Preferred, as
amended February 1994.
10.11** Preferred Stock Purchase Agreement dated as of June
22, 1989 by and between Registrant and David A.
Brewer.
10.12** Form of Subscription and Stock Purchase Agreement
dated January 1991 by and between Registrant and
certain purchasers of Series A Preferred Stock.
10.13** Form of Subscription and Stock Purchase Agreement
dated July 1989 by and between Registrant and certain
purchasers of shares of Series B Preferred Stock.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.14** Form of Subscription and Stock Purchase Agreement
dated December 1989 by and between Registrant and
certain purchasers of shares of Series B Preferred
Stock.
10.15** Form of Subscription and Stock Purchase Agreement
dated August/September 1990 by and between Registrant
and certain purchasers of shares of Series C Preferred
Stock.
10.16** Subscription and Stock Purchase Agreement for the
purchase of shares of Series C Preferred Stock dated
September 6, 1990 by and between Registrant and Draper
Associates Polaris Fund.
10.17** Subscription and Stock Purchase Agreement dated
September 7, 1990 by and between Registrant and Adlar
Turnkey Manufacturing Corporation.
10.18** Form of Subscription and Stock Purchase Agreement for
shares of Series D and Series E Preferred Stock and
Warrants dated July 1991 by and between Registrant and
certain purchasers of shares of Series D and Series E
Preferred Stock.
10.19** Series E Preferred Stock Purchase Agreement dated
August 18, 1991, as amended as of January 30, 1996, by
and between Registrant and Ailicec California
Corporation.
10.20** Series F Preferred Stock Purchase Agreement dated as
of March 5, 1996 by and between Registrant and
purchasers of Series F Preferred Stock.
10.21** Purchase and Debt Restructuring Agreement dated as of
August 3, 1994 by and between Registrant and Ailicec
International Enterprises Limited.
10.22** Note Purchase Agreement dated August 3, 1994 by and
between Registrant and certain purchasers of notes and
warrants for the purchase of Common Stock.
10.23** Warrant to Purchase Stock dated December 31, 1994 by
and between Registrant and Ailicec International
Enterprises Limited.
10.24** Common Stock Purchase Warrant dated December 16, 1996,
and an amendment thereto dated February 13, 1997, by
and between Registrant and Michael Crandell.
10.25** Common Stock Purchase Warrant dated December 16, 1996,
and an amendment thereto dated February 13, 1997, by
and between Registrant and Larry Crandell.
10.26** Asset Purchase Agreement dated July 31, 1996, as
amended December 16, 1996, by and between Registrant
and the Crandell Group, Inc.
10.27**+ Development Agreement dated September 25, 1991 and
amended as of February 12, 1997 by and between
Registrant and Ailicec International Enterprises
Limited.
10.28** Common Stock Purchase Option dated as of March 29,
1996 by and between Registrant and Steven J.
Carnevale.
10.29** Common Stock Purchase Option dated as of March 29,
1996 by and between Registrant and Thomas B. Aikin.
10.30** Promissory Note to Lon B. Radin dated March 1, 1992
from Registrant.
10.31**+ Development and Supply Agreement dated June 30, 1995
by and between Registrant and Samsung Electronics
Corporation.
10.32**+ Software License Agreement dated September 30, 1996 by
and between Registrant and Oki Data Corporation.
10.33**+ Supply and License Agreement dated November 1, 1996 by
and between Registrant and Pixel Magic, Inc.
10.34**+ Facsimile Product Development Agreement dated June 9,
1994 by and between Registrant and Xerox Corporation.
10.35**+ Facsimile Product Development Agreement dated November
23, 1994 by and between Registrant and Xerox
Corporation.
10.36**+ Master Development, Purchase and Distribution License
Agreement dated effective as of January 31, 1997 by
and between Registrant and Hewlett-Packard Company.
10.37** Employment Agreement dated July 31, 1996 between
Registrant and Michael Crandell.
10.38** Security Agreement dated July 31, 1996 by and between
Registrant and the Crandell Group, Inc.
10.39**+ OEM Purchase Agreement dated February 22, 1995, as
amended February 21, 1997, by and between Registrant
and Oki America, Inc.
10.40 Loan and Security Agreement dated August 23, 1996 by
and between Registrant and Cupertino National Bank &
Trust and the amendment thereto dated March 11, 1997
and the amendment thereto dated March 31, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.41** Form of Dealer Agreement.
10.42+ Agreement dated November 30, 1994 by and between the
Crandell Group, Inc. and Intel Corporation as amended
May 11, 1995, assigned and delegated to Registrant as
of July 30, 1996 and as further amended December 23,
1996.
11.1 Calculation of loss per share.
23.1 Independent Auditors' Consent and Report on Schedule
(see page S-1).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-6).
27.1** Financial Data Schedule.
</TABLE>
- --------
**Previously filed.
+ Confidential treatment requested.
<PAGE>
EXHIBIT 1.1
OHS DRAFT 5/07/97
JETFAX, INC.
3,500,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
June ___, 1997
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
JetFax, Inc., a Delaware corporation (the "Company"), the selling
securityholders named in Schedule 2 hereto (the "Selling Securityholders") and
Edward R. Prince, III, Chairman, President and Chief Executive Officer of the
Company (the "Founding Stockholder"), hereby confirm their agreement with the
several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom
you have been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
----------
Company proposes to issue and sell and the Selling Securityholders propose to
sell to the several Underwriters an aggregate of 2,750,000 shares and 750,000
shares, respectively (the "Firm Securities"), of the Company's Common Stock, par
value $.01 per share ("Common Stock"). The Company also proposes to issue and
sell to the several Underwriters not more than 525,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 4 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters
- ----------------------------------
/1/ Plus an option to purchase from the Company up to 525,000 additional shares
to cover over-allotments.
<PAGE>
pursuant to such option are referred to herein as the "Option Securities", and
the Firm Securities and any Option Securities are collectively referred to
herein as the "Securities".
2. Representations and Warranties of the Company and the Founding
--------------------------------------------------------------
Stockholder. The Company and the Founding Stockholder represent and warrant to,
- ------------
and agree with, jointly and severally, each of the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-23763) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing with
the Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
A. if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements;
2
<PAGE>
B. if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
C. if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending
use of any Preliminary Prospectus. When any Preliminary Prospectus was filed
with the Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective) and
on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule
3
<PAGE>
462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and is duly qualified to transact business as foreign corporations and is in
good standing under the laws of all other jurisdictions where the ownership or
leasing of its property or the conduct of its business requires such
qualification, except where the failure to be so qualified, taken as a whole,
does not amount to a material liability or disability to the Company.
(e) The Company has full corporate power to own or lease its
property and conduct its business as described in the Registration Statement and
the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full corporate power to enter into
this Agreement and to carry out all the terms and provisions hereof to be
carried out by it.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Firm Securities and the Option Securities
have been duly authorized and at the Firm Closing Date or the related Option
Closing Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. No holders of
outstanding shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and no holder
of securities of the Company has any right which has not been fully exercised or
waived (either expressly or through the expiration of applicable notice periods)
to require the Company to register the offer or sale of any securities owned by
such holder under the Act in the public offering contemplated by this Agreement.
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
(h) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (B) warrants, rights or
options to subscribe for or purchase from the Company any such capital stock or
any such convertible or exchangeable securities or obligations or (C)
obligations of the Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(i) The financial statements and schedule of the Company included in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company and the results of operations and changes in financial
condition as of the dates and periods therein specified. Such financial
statements and schedule have been prepared in accordance with generally accepted
4
<PAGE>
accounting principles consistently applied throughout the periods involved
(except as otherwise noted therein). The selected financial data set forth under
the caption "Selected Financial Data" in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) fairly present, on
the basis stated in the Prospectus (or such Preliminary Prospectus), the
information included therein.
(j) Deloitte & Touche LLP, who have certified certain financial
statements of the Company and delivered their report with respect to the audited
financial statements and schedule included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants as required by the
Act and the applicable rules and regulations thereunder.
(k) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws relating to or affecting the
rights of creditors generally, (ii) as to rights to indemnification and
contribution which may be limited by applicable law and equitable principles and
(iii) as such enforceability may be limited by general principles of equity,
including without limitation concepts of materiality, reasonableness, good faith
and fair dealing, and the possible unavailability of specific performance or
injunctive relief, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(l) No legal or governmental proceedings are pending to which the
Company is a party or to which the property of the Company is subject that are
required to be described in the Registration Statement or the Prospectus and are
not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and no such proceedings have been threatened
against the Company or with respect to any of its property; and no contract or
other document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or filed as required.
(m) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company is a party or by which the Company or any of
its property is bound, or the charter documents or by-laws of the Company, or
any statute or any judgment, decree, order, rule or
5
<PAGE>
regulation of any court or other governmental authority or any arbitrator
applicable to the Company.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, the Company has not
sustained any material loss or interference with its business or property from
fire, flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding and
there has not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth or results of operations of the
Company, except in each case as described in or contemplated by the Prospectus
or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus.
(o) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Securityholders under this Agreement).
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), (i) the Company has
not incurred any material liability or obligation, direct or contingent, nor
entered into any material transaction not in the ordinary course of business;
(ii) the Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock; and (iii) there has not been any material change in the capital
stock, short-term debt or long-term debt of the Company, except in each case as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(q) The Company has good and marketable title in fee simple to all
items of real property and marketable title to all personal property owned by
it, in each case free and clear of any security interests, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company, and any real
property and buildings held under lease by the Company are held under valid,
subsisting and enforceable leases, with such exceptions as are not material and
do not interfere with the use made or proposed to be made of such property and
buildings by the Company, in each case except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(r) No labor dispute with the employees of the Company exists or is
threatened or imminent that could result in a material adverse change in the
condition (financial
6
<PAGE>
or otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(s) The Company owns or possesses, or can acquire on reasonable
terms, all material patents, patent applications, trademarks, service marks,
trade names, licenses, copyrights and proprietary or other confidential
information currently employed by it in connection with its business, and the
Company has not received any notice of infringement of or conflict with asserted
rights of any third party with respect to any of the foregoing which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(t) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the business in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(u) The Company possesses all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not received
any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(v) The Company will conduct its operations in a manner that will
not subject it to registration as an investment company under the Investment
Company Act of 1940, as amended, and this transaction will not cause the Company
to become an investment company subject to registration under such Act.
(w) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company) and has paid all taxes required to be paid by it
and any other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being contested in good faith or as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
7
<PAGE>
(x) The Company is not in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials and the Company has
received all permits, licenses or other approvals required of it under
applicable federal and state occupational safety and health and environmental
laws and regulations to conduct its business, and the Company is in compliance
with all terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals which would not, singly or in the
aggregate, result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(y) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(z) The Company does not own any shares of stock or any other equity
securities of any corporation or have any equity interest in any firm,
partnership, association or other entity, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(aa) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(ab) No default exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company is a party
or by which the Company or its property is bound or may be affected in any
material adverse respect with regard to the property, business or operations of
the Company.
(ac) The Company has not distributed and, prior to the later of (i)
the Firm Closing Date and (ii) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or other materials, if any, permitted by the Act.
(ad) The Company has complied with all provisions of Section 517.075,
Florida Statutes and all regulations promulgated thereunder relating to doing
business with the
8
<PAGE>
Government of Cuba or with any person or any affiliate located in Cuba and is in
compliance with all provisions of the U.S. Cuban Liberty and Democratic
Solidarity (LIBERTAD) Act of 1996.
(ae) None of the Company or any director, officer, agent, employee or
other person acting on behalf of the Company has (i) used, or authorized the use
of, any corporate or other funds for unlawful payments, contributions, gifts or
entertainment, (ii) made unlawful expenditures relating to political activity to
government officials or others, or (iii) established or maintained any unlawful
or unrecorded funds in violation of Section 30A of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), except where doing so would not in the
aggregate have a material adverse effect on the Company. None of the Company or
any director, officer, agent, employee or other person acting on behalf of the
Company has accepted or received any unlawful contributions, payments, gifts or
expenditures.
(af) Except where such failures to comply or violations would not in
the aggregate have a material adverse effect on the Company, (i) the Company has
complied with the Immigration Reform and Control Act of 1986 and all regulations
promulgated thereunder ("IRCA") with respect to the completion and maintenance
of Forms I-9, Employment Verification Forms, for all of its current employees
and reverification of the employment status of any and all employees whose
employment authorization documents indicated a limited period of employment
authorization; (ii) with respect to all former employees who left the Company's
employment within three years prior to the date hereof, the Company has complied
with IRCA with respect to the maintenance of Forms I-9 for at lease three years
or for one year beyond the date of termination, whichever is later; (iii) the
Company has had no immigration violations and has employed only individuals
authorized to work in the United States and has never been the subject of any
inspection or investigation relating to its compliance with or violation of
IRCA; and (iv) the Company has not been warned, fined or otherwise penalized by
reason or any failure to comply with IRCA, and no such proceeding is pending or
threatened.
(ag) The Company's written agreement with Hewlett-Packard Company
filed as Exhibit 10.36 to the Registration Statement (the "Hewlett-Packard
Agreement") is a legal, valid and binding obligation of the Company and, to the
Company's knowledge, Hewlett-Packard Company ("Hewlett-Packard"), is enforceable
in accordance with its terms against the Company and, to the Company's
knowledge, Hewlett-Packard (except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other laws relating to or affecting the rights of creditors generally, (ii) as
to rights to indemnification and contribution which may be limited by applicable
law and equitable principles and (iii) as such enforceability may be limited by
general principles of equity, including without limitation concepts of
materiality, reasonableness, good faith and fair dealing, and the possible
unavailability of specific performance or injunctive relief, regardless of
whether such enforceability is considered in a proceeding in equity or at law),
and neither the Company nor, to the Company's knowledge, Hewlett-Packard is now
in violation or breach of, or in default with respect to, any material provision
thereof.
(ah) The statements contained in each Preliminary Prospectus and in
the Prospectus, and any supplements or amendments thereto, relating to Hewlett-
Packard and the Company's relationship with Hewlett-Packard have not included
any untrue statement of a material
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fact or omitted to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3. Representations and Warranties of the Selling Securityholders. Each
-------------------------------------------------------------
Selling Securityholder, severally not jointly and only with respect to itself,
represents and warrants to, and agrees with, each of the several Underwriters
that:
(a) Such Selling Securityholder has full power to enter into this
Agreement and to sell, assign, transfer and deliver to the Underwriters the
Securities to be sold by such Selling Securityholder hereunder in accordance
with the terms of this Agreement, and this Agreement has been duly executed and
delivered by such Selling Securityholder.
(b) Such Selling Securityholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such Selling
Securityholder, the "Power-of-Attorney" and the "Custody Agreement",
respectively), each in the form heretofore delivered to the Representatives,
appointing Edward R. Prince, III or Allen K. Jones as such Selling
Securityholder's attorney-in-fact (the "Attorney-in-Fact") with authority to
execute, deliver and perform this Agreement on behalf of such Selling
Securityholder and appointing American Stock Transfer & Trust Company as
custodian thereunder (the "Custodian"). Certificates in negotiable form,
endorsed in blank or accompanied by blank stock powers duly executed, with
signatures appropriately guaranteed, representing the Securities to be sold by
such Selling Securityholder hereunder have been deposited with the Custodian
pursuant to the Custody Agreement for the purpose of delivery pursuant to this
Agreement. Such Selling Securityholder has full power to enter into the Custody
Agreement and the Power-of-Attorney and to perform its obligations under the
Custody Agreement. The Custody Agreement and the Power-of-Attorney have been
duly executed and delivered by such Selling Securityholder and, assuming due
authorization, execution and delivery by the Custodian, are the legal, valid,
binding and enforceable instruments of such Selling Securityholder. Such Selling
Securityholder agrees that each of the Securities represented by the
certificates on deposit with the Custodian is subject to the interests of the
Underwriters hereunder, that the arrangements made for such custody, the
appointment of the Attorney-in-Fact and the right, power and authority of the
Attorney-in-Fact to execute and deliver this Agreement, to agree on the price at
which the Securities (including such Selling Securityholder's Securities) are to
be sold to the Underwriters, and to carry out the terms of this Agreement, are
to that extent irrevocable and that the obligations of such Selling
Securityholder hereunder shall not be terminated, except as provided in this
Agreement or the Custody Agreement, by any act of such Selling Securityholder,
by operation of law or otherwise, whether in the case of any individual Selling
Securityholder by the death or incapacity of such Selling Securityholder, in the
case of a trust or estate by the death of the trustee or trustees or the
executor or executors or the termination of such trust or estate, or in the case
of a corporate or partnership Selling Securityholder by its liquidation or
dissolution or by the occurrence of any other event. If any individual Selling
Securityholder, trustee or executor should die or become incapacitated or any
such trust should be terminated, or if any corporate or partnership Selling
Securityholder shall liquidate or dissolve, or if any other event should occur,
before the delivery of such Securities hereunder, the certificates for such
Securities deposited with the Custodian shall be delivered by the Custodian in
accordance with the respective terms and conditions of this Agreement as if such
death, incapacity, termination, liquidation or dissolution or other event had
10
<PAGE>
not occurred, regardless of whether or not the Custodian or the Attorney-in-Fact
shall have received notice thereof.
(c) Such Selling Securityholder is the lawful owner of the
Securities to be sold by such Selling Securityholder hereunder and upon sale and
delivery of, and payment for, such Securities, as provided herein, such Selling
Securityholder will convey good and marketable title to such Securities, free
and clear of any security interests, liens, encumbrances, equities, claims or
other defects.
(d) Such Selling Securityholder has not, directly or indirectly, (i)
taken any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) since the filing of the Registration
Statement (A) sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Securityholders
under this Agreement).
(e) Such Selling Securityholder has not distributed and, prior to
the later of (i) the Firm Closing Date and (ii) the completion of the
distribution of the Securities, will not distribute any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or other materials, if
any, permitted by the Act.
(f) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986, as
amended, with respect to the transactions herein contemplated, each Selling
Securityholder agrees to deliver to you prior to or on the Firm Closing Date, as
hereinafter defined, a properly completed and executed United States Treasury
Department Form W-8 or W-9 (or other applicable form of statement specified by
Treasury Department regulations in lieu thereof).
(g) The sale by such Selling Securityholder of Securities pursuant
hereto is not prompted by any adverse information concerning the Company that is
not set forth in the Registration Statement or the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(h) The sale of the Securities to the Underwriters by such Selling
Securityholder pursuant to this Agreement, the compliance by such Selling
Securityholder with the other provisions of this Agreement and the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, such as may be required under state securities or blue sky laws and,
if the registration statement filed with respect to the Securities (as amended)
is not effective under the Act as of the time of execution hereof, such as may
be required (and shall be obtained as provided in this Agreement) under the Act,
or (ii) conflict with or result in a breach or violation of any of the
11
<PAGE>
terms and provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which such Selling
Securityholder is a party or by which such Selling Securityholder or any of such
Selling Securityholder's properties are bound, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to such Selling Securityholder.
(i) To the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by such Selling Securityholder specifically
for use therein, such Preliminary Prospectus did, and the Registration Statement
and the Prospectus and any amendments or supplements thereto, when they become
effective or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act and the respective rules
and regulations of the Commission thereunder and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in the light of the
circumstances under which they are made, not misleading. Such Selling
Securityholder has reviewed the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and the Registration
Statement, and the information regarding such Selling Securityholder set forth
therein under the caption "Principal and Selling Stockholders" is complete and
accurate.
(j) If such Selling Securityholder is a director of the Company,
such Selling Securityholder has reviewed the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto
and such Preliminary Prospectus did, and the Registration Statement and the
Prospectus and any amendments or supplements thereto, when they become effective
or are filed with the Commission, as the case may be, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they are made, not misleading.
4. Purchase, Sale and Delivery of the Securities.
---------------------------------------------
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company and each of the Selling Securityholders, severally and not
jointly, agree to issue and sell to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company, at
a purchase price of $________ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company and the Selling
Securityholders to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the respective accounts of the Company and the Selling Securityholders. Such
delivery of and payment for the Firm Securities shall be made at the offices of
General Counsel
12
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Associates LLP, 1891 Landings Drive, Mountain View, California 94043 at 9:30
A.M., New York time, on June ___, 1997, or at such other place, time or date as
the Representatives and the Company and the Selling Securityholders may agree
upon or as the Representatives may determine pursuant to Section 11 hereof, such
time and date of delivery against payment being herein referred to as the "Firm
Closing Date". The Company and the Selling Securityholders will make such
certificate or certificates for the Firm Securities available for checking and
packaging by the Representatives at the offices in New York, New York of the
Company's transfer agent or registrar or of Prudential Securities Incorporated
at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 4. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within thirty days after the date of the
Prospectus (or, if such thirtieth day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading). The Underwriters shall not be under any obligation to
purchase any of the Option Securities prior to the exercise of such option. The
Representatives may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representatives and Company may agree upon or as the Representatives may
determine pursuant to Section 11 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the option
as such Underwriter is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares. If the option is exercised as to all or
any portion of the Option Securities, one or more certificates in definitive
form for such Option Securities, and payment therefor, shall be delivered on the
related Option Closing Date in the manner, and upon the terms and conditions,
set forth in paragraph (a) of this Section 4, except that reference therein to
the Firm Securities and the Firm Closing Date shall be deemed, for purposes of
this paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) The Company and the Selling Securityholders hereby acknowledge
that the wire transfer by or on behalf of the Underwriters of the purchase price
for any Securities does not constitute closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt for Securities by the
Underwriters indicates completion of the closing of a purchase
13
<PAGE>
of the Securities from the Company and/or the Selling Securityholders.
Furthermore, in the event that the Underwriters wire funds to the Company and/or
the Selling Securityholders prior to the completion of the closing of a purchase
of Securities, the Company and/or the Selling Securityholders hereby acknowledge
that until the Underwriters execute and deliver a receipt for the Securities, by
facsimile or otherwise, the Company and/or the Selling Securityholders will not
be entitled to the Wired Funds and shall return the Wired Funds to the
Underwriters as soon as practicable (by wire transfer of same-day funds) upon
demand. In the event that the closing of a purchase of Securities is not
completed and the Wired Funds are not returned by the Company and/or the Selling
Securityholders to the Underwriters on the same day the Wired Funds were
received by the Company and/or the Selling Securityholders, the Company and/or
the Selling Securityholders agree to pay to the Underwriters in respect of each
day the Wired Funds are not returned by it, in same-day funds, interest on the
amount of such Wired Funds in an amount representing the Underwriters' cost of
financing as reasonably determined by Prudential Securities Incorporated.
(d) It is understood that either of you, individually and not as one
of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations hereunder.
5. Offering by the Underwriters. Upon your authorization of the release
----------------------------
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
6. Covenants of the Company. The Company covenants and agrees
------------------------
with each of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required
to be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus,
Term Sheet or any amendment to the Registration Statement or any Rule 462(b)
Registration Statement of which the Representatives previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representatives shall not have given their
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to
14
<PAGE>
the Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(ii) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, provided, however, that in connection therewith
-----------------
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 6(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits
15
<PAGE>
thereto) and (iii) so long as a prospectus relating to the Securities is
required to be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request; without limiting the application of
clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 10:00 A.M., New York City time, on
such date or (B) 2:00 P.M., New York City time, on the business day following
the date of determination of the public offering price, if such determination
occurred after 10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date. The
Company will provide or cause to be provided to each of the Representatives, and
to each Underwriter that so requests in writing, a copy of each report on Form
SR filed by the Company as required by Rule 463 under the Act.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives an earnings
statement of the Company that satisfies the provisions of Section 11(a) of the
Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, (i) offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days after the date hereof, except (A) pursuant to this
Agreement, (B) pursuant to outstanding options disclosed in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
(C) grants of options under the Company's 1995 Stock Plan or 1997 Director
Option Plan provided that such options are not exercisable prior to the
expiration of such 180 day period, (D) sales of Common Stock pursuant to the
Company's 1997 Employee Stock Purchase Plan and (E) pursuant to the terms of
convertible securities of the Company outstanding on the date hereof or (ii)
release any portion of the securities subject to lock-up agreements with the
Company described in the Registration Statement from the lock-up provisions of
such agreements.
(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Securityholders
under this Agreement).
(j) The Company will obtain the agreements described in Section 9(h)
hereof prior to the Firm Closing Date.
16
<PAGE>
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the
date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the commencement of the offering of the Securities. The
Company will ensure that the Securities remain included for quotation on the
Nasdaq National Market following the Firm Closing Date.
7. Covenants of the Selling Securityholders. Each of the Selling
----------------------------------------
Securityholders covenants and agrees with each of the Underwriters that:
(a) Each Selling Securityholder will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any securities of the Company legally or beneficially owned by such Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, securities of the Company for a period of 180 days after the
date hereof (except for the sale of Securities by the Selling Securityholders
under this Agreement).
(b) Each Selling Securityholder will not, directly or indirectly,
(i) take any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or (B) pay or agree
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of Securities by the
Selling Securityholders under this Agreement).
8. Expenses.
--------
(a) The Company and the Selling Securityholders will pay all costs
and expenses incident to the performance of their respective obligations under
this Agreement, whether
17
<PAGE>
or not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 13 hereof, including all costs and expenses
incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company or the Selling Securityholders, (iv) preparation,
issuance and delivery to the Underwriters of any certificates evidencing the
Securities, including transfer agent's and registrar's fees, (v) the
qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. (the "NASD") relating to the Securities,
(vii) any quotation of the Securities on the Nasdaq National Market, (viii) any
meetings with prospective investors in the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters) and (ix) advertising by, or pursuant to the direction of, the
Company relating to the offering of the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 9 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 13 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any event
be liable to any of the Underwriters for the loss of anticipated profits from
the transactions covered by this Agreement.
9. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company, the Founding Stockholder and each
of the other Selling Securityholders contained herein as of the date hereof and
as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to
the accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company and each of the Selling
Securityholders of their covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Original Registration Statement or such amendment
and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have been declared effective not later than the
earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to
the Original Registration Statement or to the Registration Statement, as the
case may be, containing information regarding the initial public offering price
of the Securities has been filed with the Commission and (ii) the time
confirmations are sent or given as specified by Rule
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462(b)(2) or with respect to the Original Registration Statement, or such later
time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Representatives, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Representatives shall have received an opinion, dated the
Firm Closing Date, of General Counsel Associates LLP, counsel for the Company
and the Selling Securityholders, to the effect that:
(i) the Company has been duly organized and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation and is duly qualified to transact business as foreign
corporations and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its property or the conduct
of its business requires such qualification, except where the failure,
taken as a whole, to be so qualified does not amount to a material
liability or disability to the Company;
(ii) the Company has the corporate power to own or lease its
property and conduct its business as described in the Registration
Statement and the Prospectus, and the Company has the corporate power to
enter into this Agreement and to carry out all the terms and provisions
hereof to be carried out by it;
(iii) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were, to such
counsel's knowledge, not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities;
the Firm Securities have been duly authorized by all necessary corporate
action of the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully paid
and nonassessable; the Securities have been duly included for trading on
the Nasdaq National Market; no holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or, to such
counsel's knowledge, other rights to subscribe for any of the Securities;
and, except for the Securities being sold by the Selling Securityholders,
no holders of securities of the Company are entitled to have such
securities registered under the Registration Statement;
(iv) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide a
fair summary of such provisions; and the statements set forth under the
headings "Business--Litigation," "Management" and "Certain
19
<PAGE>
Transactions" in the Prospectus, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to therein,
provide a fair summary of such legal matters, documents and proceedings;
(v) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company;
(vi) (A) to such counsel's knowledge, no legal or governmental
proceedings are pending to which the Company is a party or to which the
property of the Company is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein,
and, to the best knowledge of such counsel, no such proceedings have been
threatened against the Company or with respect to any of its property and
(B) to such counsel's knowledge, no contract or other document is required
to be described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement that is not described
therein or filed as required;
(vii) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A) to
such counsel's knowledge, require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained and such as may be required under state
securities or blue sky laws, (B) to such counsel's knowledge, conflict with
or result in a breach or violation of any of the material terms and
provisions of, or constitute a material default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which
the Company is a party or by which the Company or its property is bound, or
any statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator known to such counsel and
applicable to the Company or (C) conflict with or result in a breach or
violation of the charter documents or by-laws of the Company;
(viii) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or threatened or, to the best knowledge of such counsel,
are contemplated by the Commission;
(ix) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder;
20
<PAGE>
(x) if the Company elects to rely on Rule 434, the Prospectus is
not "materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xi) to such counsel's knowledge, the Company does not own any
shares of stock or any other equity securities of any corporation or have
any equity interest in any firm, partnership, association or other entity,
except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus);
(xii) to such counsel's knowledge, no material default exists,
and no event has occurred which, with notice or lapse of time or both,
would constitute a material default in the due performance and observance
of any material term, covenant or condition of any material indenture,
mortgage, deed of trust, lease or other agreement or instrument to which
the Company is a party or by which the Company or any of its property is
bound or may be affected in any material adverse respect with regard to the
property, business or operations of the Company, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus); and
Such counsel shall also state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, underwriters' counsel and the independent certified public
accountants of the Company, at such conferences the contents of the Registration
Statement and Prospectus and related matters were discussed, and although they
have not verified the accuracy or completeness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to the attention
of such counsel which caused them to believe that the Registration Statement, as
of its effective date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, as of its
date or the date of such opinion, included or includes any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Michaelson & Wallace, special counsel for the Company, to
the effect that to such counsel's knowledge, the Company owns or possesses, or
can acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and proprietary or
other confidential information currently employed by it in
21
<PAGE>
connection with its business, and the Company has not received any notice of
infringement of or conflict with asserted rights of any third party with respect
to any of the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus);
(d) The Selling Securityholders shall have furnished to the
Representatives the opinion of General Counsel Associates LLP, counsel to the
Company and the Selling Securityholders, dated the Firm Closing Date, to the
effect that:
(i) each such Selling Securityholder has full corporate power to
enter into this Agreement, the Custody Agreement and the Power-of-Attorney
and to sell, transfer and deliver the Securities being sold by such Selling
Securityholder hereunder in the manner provided in this Agreement and to
perform its obligations under the Custody Agreement; the execution and
delivery of this Agreement, the Custody Agreement and the Power-of-Attorney
have been duly authorized by all necessary action of each Selling
Securityholder; this Agreement, the Custody Agreement and the Power-of-
Attorney have been duly executed and delivered by each Selling
Securityholder; assuming due authorization, execution and delivery by the
Custodian, the Custody Agreement and the Power-of-Attorney are the legal,
valid, binding and enforceable instruments of each such Selling
Securityholder, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
or other laws relating to or affecting the rights of creditors generally,
(ii) as to rights to indemnification and contribution which may be limited
by applicable law and equitable principles and (iii) as such enforceability
may be limited by general principles of equity, including without
limitation concepts of materiality, reasonableness, good faith and fair
dealing, and the possible unavailability of specific performance or
injunctive relief, regardless of whether such enforceability is considered
in a proceeding in equity or at law;
(ii) the delivery by each Selling Securityholder to the several
Underwriters of certificates for the Securities being sold hereunder by
such Selling Securityholder against payment therefor as provided herein,
will convey good and valid title to such Securities to the several
Underwriters who purchased such shares in good faith and without notice of
any such security interest, lien, encumbrance, equity, claim, other defect
or any other adverse claim within the meaning of the Uniform Commercial
Code;
(iii) the sale of the Securities to the Underwriters by each
Selling Securityholder pursuant to this Agreement, the compliance by each
Selling Securityholder with the other provisions of this Agreement, the
Custody Agreement and the Power-of-Attorney and the consummation of the
other transactions herein contemplated do not (i) to such counsel's
knowledge, require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained and such as may be required under state securities or blue
sky laws, or (ii) to such counsel's knowledge, conflict with or result in a
material breach or violation of any of the material terms and provisions
of, or constitute a material default under any material indenture,
mortgage, deed
22
<PAGE>
of trust, lease or other agreement or instrument, known to such counsel, to
which such Selling Securityholder is a party or by which such Selling
Securityholder or any of such Selling Securityholder's properties are
bound, or any statute or any judgment, decree, order, rule or regulation,
known to such counsel, of any court or other governmental authority or any
arbitrator applicable to such Selling Securityholder.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of the Selling
Securityholders and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (c) shall include any amendment or supplement thereto at the date of
such opinion.
(e) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Orrick, Herrington & Sutcliffe LLP, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities, the
Registration Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(f) The Representatives shall have received from Deloitte & Touche
LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect to the Company
within the meaning of the Act and the applicable rules and regulations
thereunder;
(ii) in their opinion, the audited financial statements and
schedule examined by them and included in the Registration Statement and
the Prospectus comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iii) on the basis of a reading of the latest available interim
unaudited financial statements of the Company, a reading of the unaudited
amounts for total revenues, loss from operations and net loss for the three
months ended March 31, 1996 and 1997, net loss per share for the three
months ended March 31, 1997 and of the unaudited financial statements of
the Company for the periods from which such amounts are derived, carrying
out certain specified procedures (which do not constitute an examination
made in accordance with generally accepted auditing standards) that would
not necessarily reveal matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the minute books of the
stockholders, the board of directors and any committees thereof of the
Company, and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters, nothing came to their
attention that caused them to believe that:
23
<PAGE>
(A) the unaudited financial statements of the Company
included in the Registration Statement and the Prospectus do not
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations thereunder or are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in
the Registration Statement and the Prospectus;
(B) the unaudited amounts for total revenues, loss from
operations and total and per share amounts of net income included in
the Registration Statement and the Prospectus do not loss with the
amounts set forth in any unaudited financial statements for those same
periods or are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the corresponding amounts in the audited financial statements included
in the Registration Statement and the Prospectus; and
(C) at a specific date not more than five business days
prior to the date of such letter, there were any changes in the
capital stock or any increase in long-term debt of the Company or any
decreases in net current assets or stockholders' equity of the
Company, in each case compared with amounts shown on the January 4,
1997 balance sheet included in the Registration Statement and the
Prospectus, or for the period from January 5, 1997 to such specified
date there were any decreases, as compared with the comparable period
of the prior fiscal quarter, in total revenues, or increase in loss
before extraordinary item and income taxes or total or per share
amounts of net loss of the Company, except in all instances for
changes, decreases or increases set forth in such letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and are included in the Registration Statement and the
Prospectus under the captions "Summary Financial Information,"
"Capitalization," "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in
Exhibit 11.1 to the Registration Statement, and have compared such amounts,
percentages and financial information with such records of the Company and
with information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
24
<PAGE>
References to the Registration Statement and the Prospectus in this
paragraph (e) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(g) The Representatives shall have received a certificate, dated the
Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company has
not sustained any material loss or interference with its business or
property from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse
change, or any development involving a prospective material adverse change,
in the condition (financial or otherwise), management, business prospects,
net worth or results of operations of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment
or supplement thereto).
(h) The Representatives shall have received a certificate from each
Selling Securityholder, signed by or on behalf of such Selling Securityholder,
dated the Firm Closing Date, to the effect that:
(i) the representations and warranties of such Selling
Securityholder in this Agreement are true and correct as if made on and as
of the Firm Closing Date;
(ii) to the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by such Selling Securityholder
specifically for use therein, the Registration Statement, as amended as of
the Firm Closing Date, does not include any untrue statement
25
<PAGE>
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and
(iii) such Selling Securityholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the Firm
Closing Date.
(i) The Representatives shall have received from all of the
Company's officers and directors and certain stockholders, including the Selling
Stockholders, owning upon completion of the Offering, in the aggregate,
7,033,944 shares of Common Stock, an agreement to the effect that such person
will not, directly or indirectly, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of an option to purchase or other sale or disposition) of
any shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 180 days after the
date of this Agreement (except for the sale of Securities under this Agreement).
(j) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(k) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
10. Indemnification and Contribution.
---------------------------------
(a) The Company and the Founding Stockholder agree to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter or such controlling
26
<PAGE>
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company or the Founding Stockholder in Sections 2 or 3 of this Agreement;
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or the Founding
Stockholder or based upon written information furnished by or on behalf of
the Company or the Founding Stockholder filed in any jurisdiction in order
to qualify the Securities under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities
exchange (each an "Application");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in connection
with the marketing of the Securities, including without limitation, slides,
videos, films and tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company and the
-----------------
Founding Stockholder will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein; and provided, further, that the Company or the
-----------------
Founding Stockholder will not be liable to any Underwriter or any person
controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from such Underwriter but was
not sent or given a copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company with
Sections 6(d) or 6(e) of this Agreement. This indemnity agreement will be in
addition to any liability which the Company and the Founding Stockholder may
otherwise have. Neither the Company nor the Founding Stockholder will, without
the prior written consent of the Underwriter or Underwriters purchasing, in the
aggregate,
27
<PAGE>
more than fifty percent (50%) of the Securities, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(b) Each Selling Securityholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who signs
the Registration Statement, each Underwriter and each person who controls the
Company or any Underwriter within the meaning of the Act or the Exchange Act and
each other Selling Securityholder against any losses, claims, damages or
liabilities to which the Company, any such director, officer, such Underwriter
or any such controlling person may become subject under the Act, the Exchange
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement made by such Selling Securityholder in
Section 3 of this Agreement, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or (iii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Selling
Securityholder for use therein; provided, however, that such Selling
-------- -------
Securityholder will not be liable to any Underwriter or any person controlling
such Underwriter with respect to any such untrue statement or omission made in
any Preliminary Prospectus that is corrected in the Prospectus (or any amendment
or supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 6(d) and (e) of this
Agreement; and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company, any such director, officer, such Underwriter or any
such controlling person in connection with investigating or defending any such
loss, claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which any Selling Securityholder
may otherwise have. Each Selling Securityholder will not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the aggregate,
more than fifty percent (50%) of the Securities, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an
28
<PAGE>
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(c) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, each Selling Securityholder and each person,
if any, who controls the Company or such Selling Securityholder within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company or any such director
or officer of the Company, such Selling Securityholder or any such controlling
person of the Company or such Selling Securityholder may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
(ii) the omission or the alleged omission to state therein a material fact
required to be stated in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person or
such Selling Securityholder in connection with investigating or defending any
such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 10, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 10. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
-----------------
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend such
action, the indemnifying party will not be liable to such indemnified party
under this Section 10 for any legal or other
29
<PAGE>
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this Section
10, representing the indemnified parties under such paragraph (a) who are
parties to such action or actions) or (ii) the indemnifying party does not
promptly retain counsel satisfactory to the indemnified party or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 10 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Securityholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company and the Selling
Securityholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Securityholders or the Underwriters, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company, the Selling Securityholders and the Underwriters
agree that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (e). Notwithstanding any other provision of this paragraph
(d), no Underwriter shall be obligated to make contributions hereunder that in
the aggregate exceed the total public offering price of the Securities purchased
by such Underwriter under this Agreement, less the aggregate amount of any
damages that such Underwriter has otherwise been required to pay in respect of
the same or any substantially similar claim, and no person guilty of fraudulent
30
<PAGE>
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (e), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company or any
Selling Securityholder within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, shall have the same rights to contribution as the Company
or such Selling Securityholder, as the case may be.
(f) The liability of each Selling Securityholder (including the
Founding Stockholder) under this Section 10 shall not exceed an amount equal to
the initial public offering price of the Securities sold by such Selling
Securityholder to the Underwriters.
11. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 12 hereof. In the event of any default by one or more Underwriters
as described in this Section 11, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 4 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 11. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
12. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers, the
Selling Securityholders and the
31
<PAGE>
several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 10 hereof or any Selling Securityholder and (ii) delivery
of and payment for the Securities. The respective agreements, covenants,
indemnities and other statements set forth in Sections 8 and 10 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
13. Termination.
-----------
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company and the Selling Securityholders given
prior to the Firm Closing Date or the related Option Closing Date, respectively,
in the event that the Company or any Selling Securityholder shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at or
prior to the Firm Closing Date or such Option Closing Date, respectively,
(i) the Company shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with its
business or property from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding or there shall have been any material
adverse change, or any development involving a prospective material adverse
change (including without limitation a change in management or control of
the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except in
each case as described in or contemplated by the Prospectus (exclusive of
any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or Nasdaq National Market shall have been
suspended or minimum or maximum prices shall have been established on such
exchange or market system;
(iii) a banking moratorium shall have been declared by New York or
United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representatives, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.
32
<PAGE>
(b) Termination of this Agreement pursuant to this Section 13 shall
be without liability of any party to any other party except as provided in
Section 12 hereof.
14. Information Supplied by Underwriters. The statements set forth in the
------------------------------------
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 10 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
15. Notices. All communications hereunder shall be in writing and, if
-------
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company or to the Selling
Securityholders, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 1376 Willow Road, Menlo
Park, California 94025, Attention: President.
16. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company, the Selling Securityholders
and their respective successors and legal representatives, and nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person except
that (i) the indemnities of the Company and the Selling Securityholders
contained in Section 10 of this Agreement shall also be for the benefit of any
person or persons who control any Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the
Underwriters contained in Section 10 of this Agreement shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and any person or persons who control the
Company or any Selling Securityholder within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
17. Applicable Law. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
18. Consent to Jurisdiction and Service of Process. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, each Selling Securityholder accepts
for itself and in connection with its properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
33
<PAGE>
thereby in connection with this Agreement. Each Selling Securityholder
designates and appoints Edward R. Prince, III, and such other persons as may
hereafter be selected by such Selling Securityholder irrevocably agreeing in
writing to so serve, as its agent to receive on its behalf service of all
process in any such proceedings in any such court, such service being hereby
acknowledged by such Selling Securityholder to be effective and binding service
in every respect. A copy of any such process so served shall be mailed by
registered mail to each Selling Securityholder at its address provided in
Section 15 hereof; provided, however, that, unless otherwise provided by
-------- -------
applicable law, any failure to mail such copy shall not affect the validity of
service of such process. If any agent appointed by such Selling Securityholder
refuses to accept service, such Selling Securityholder hereby agrees that
service of process sufficient for personal jurisdiction in any action against
such Selling Securityholder in the State of New York may be made by registered
or certified mail, return receipt requested, to such Selling Securityholder at
its address provided in Section 15 hereof, and such Selling Securityholder
hereby acknowledges that such service shall be effective and binding in every
respect. Nothing herein shall affect the right to serve process in any other
manner permitted by law or shall limit the right of any Underwriter to bring
proceedings against such Selling Securityholder in the courts of any other
jurisdiction.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
34
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, each of
the Selling Securityholders and each of the several Underwriters.
Very truly yours,
JETFAX, INC. THE SELLING SECURITYHOLDERS
By ------------------------------------ By -------------------------------
Edward R. Prince, III, [___________________],
President, Chief Executive Officer As Attorney-in-Fact acting
and Chairman of the Board on behalf of each of the
Selling Securityholders named
in Schedule 2 to this Agreement
EDWARD R. PRINCE, III,
AS A FOUNDING STOCKHOLDER
- ---------------------------------------
Edward R. Prince, III
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
By PRUDENTIAL SECURITIES INCORPORATED
By ------------------------------------
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
35
<PAGE>
SCHEDULE 1
UNDERWRITERS
Number of Firm
Securities to
Underwriter be Purchased
- ----------- ----------------
Prudential Securities Incorporated................
Cowen & Company ..................................
________
Total 3,500,000
=========
36
<PAGE>
SCHEDULE 2
SELLING SECURITYHOLDERS
Number of Firm
Name Securities to be Sold
---- ---------------------
Antaeus Enterprises, Inc..............
Sandra Basel..........................
Douglas Y. Bech.......................
Craig Bere............................
Sam Bernstein.........................
Paul Chargois.........................
George Charos.........................
Cook Investors Ltd Partnership........
John & Patricia Cook..................
Alan M. Craft.........................
G. Paul Distefano.....................
James A. Distefano....................
Charles M. Edwards, III...............
Janice P. Edwards.....................
Janice P. Edwards, Custodian for
Meghan E. A. Edwards.................
Janice P. Edwards, Custodian for
Melanie L. Edwards...................
Jeffrey S. Gilmore....................
Granite Capital LP....................
Jean Guex-Crosier.....................
Laurence M. Haar......................
John H. Harris........................
Lawrence B. Helzel & Rebekah Helzel
Living Trust.........................
Peter Hendricks.......................
James Herrell.........................
Colin Hulme...........................
Duane Kilgore.........................
Krieger Family Trust..................
Marilyn Krieger.......................
Lambert Family Trust..................
Paul E. Lego..........................
37
<PAGE>
Number of Firm
Name Securities to be Sold
---- ---------------------
Paul G. Lego..........................
Jennifer Levin........................
Judy Levin............................
Marshall Oman Exploration Inc.........
Dalton W. Martin & Virginia W. Martin
Trust U/A/D 12/30/92.................
Barry R. Miller.......................
Craig Minor...........................
Scott P. Peters.......................
Larry B. Phillips III.................
Poly Ventures II, Limited Partnership.
Robert E. Powers......................
Edward R. Prince, Jr..................
Edward R. Prince, III.................
Prism Partners I......................
Lon B. Radin..........................
James Richardson......................
Fritz Ringling........................
William F. Rooney & Mary Alice
Rooney, Trustees under ROONEY FAMILY
TRUST dated May 10, 1996 ............
Lawrence H. Rose......................
Saratoga Springs Co. Ltd..............
Dennis M. Schaney.....................
Leo R. Schlinkert.....................
Shartsis, Friese & Ginsburg LLP.......
Rosamond P. Smythe....................
Virginia Snyder.......................
Richard & Martha Stipanovic...........
Strome Family Living Trust............
Jeffrey & Janice Susskind, Trustees of
The Susskind Family Trust U/A/D
10/27/93.............................
Traslader SA..........................
Richard D. Tucker.....................
Michael Waresh........................
WSB Trust 10/12/82 FBO Grandchildren..
38
<PAGE>
Number of Firm
Name Securities to be Sold
---- ---------------------
TOTAL --------------------------------------
[ ]
============
1
<PAGE>
EXHIBIT 4.1
[JETFAX LOGO]
NUMBER SHARES
JFX____________ JETFAX, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
<TABLE>
<C> <S>
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS STATEMENTS
THE CITY OF BOSTON, MA OR NEW YORK, NY RELATING TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
This Certifies that CUSIP 476909 10 6
</TABLE>
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
JETFAX, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
(Signature) (Signature)
- ------------------------ ------------------------------------
CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE
AND SECRETARY OFFICER
[CORPORATE SEAL OF
JETFAX, INC.
* DELAWARE *]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
/s/
- ----------------------------
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807
(310) 989-2333
(FAX) (310) 426-7450 400-19X
<PAGE>
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Secretary of the Corporation at its headquarters.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- __________Custodian_____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act____________________________
in common (State)
UNIF TRF MIN ACT-- ______Custodian (until age ____)
(Cust)
________ under Uniform Transfers
(Minor)
to Minors Act___________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- -----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------
X _____________________________________________
X _____________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
<PAGE>
By
-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17ad-15.
- -------------------------------------------
AMERICAN BANK NOTE COMPANY
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807
(310) 989-2333
(FAX) (310) 426-7450
- -------------------------------------------
<PAGE>
EXHIBIT 5.1
May 12, 1997
JetFax, Inc.
1376 Willow Road
Menlo Park, CA
RE: REGISTRATION STATEMENT NO. 333-23763 ON FORM S-1.
------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on March 21, 1997 (Registration Number
333-23763), Amendment No. 1 thereto filed on March 28, 1997 and Amendment No. 2
thereto filed on May 12, 1997 (the "Registration Statement") in connection with
the registration under the Securities Act of 1933, as amended, of 4,025,000
shares of Common Stock (the "Shares") of JetFax, Inc. (the "Company"), 3,275,000
of which are authorized but heretofore unissued (including an overallotment
option granted by the Company for 525,000 shares held by the underwriters) and
750,000 of which will be sold by selling stockholders. The Shares are to be
sold to the underwriters for resale to the public as described in the
Registration Statement and pursuant to the Underwriting Agreement filed as an
exhibit thereto. As your counsel in connection with this transaction, we have
examined the proceedings proposed to be taken in connection with said sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states, where required, the Shares when issued and sold in the
manner referred to in the Registration Statement will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very Truly Yours,
GENERAL COUNSEL ASSOCIATES LLP
<PAGE>
EXHIBIT 10.40
This LOAN AND SECURITY AGREEMENT is entered into as of August 23,1996, by
and between VENTURE LENDING, a division of Cupertino National Bank & Trust
("Bank") and JetFax, INC. ("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a cash advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents (including fees and expenses
of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
<PAGE>
"Committed Line" means One Million Five Hundred Thousand Dollars
($1,500,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
--------
standards of eligibility may be fixed and revised from time to time by
Bank in Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts arising out of progress billings, or with respect to
which goods are placed on consignment, guaranteed sale, sale or return, sale on
approval, bill and hold, or other terms by reason of which the payment by the
account debtor may be conditional;
<PAGE>
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed thirty
percent (30%) of all Accounts, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank;
(j) Accounts owing by a distributor, unless pre-approved by Bank
in writing;
(k) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(l) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
<PAGE>
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital, contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means February 22, 2000.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt; and
(d) Indebtedness to trade creditors incurred in the ordinary
course of business.
<PAGE>
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
--------
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
published in the Western edition of The Wall Street Journal, or such other rate
-----------------------
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means the date immediately preceding
the first anniversary of the date of this Agreement.
"Revolving Facility" means the facility under which Borrower may
request Bank to issue cash advances, as specified in Section 2.1 hereof.
<PAGE>
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (i) the sum of any amounts attributable
-----
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities. "Total Liabilities" means at
---
any date as of which the amount thereof shall be determined, all obligations
that should, in accordance with GAAP be classified as liabilities on the
consolidated balance sheet of Borrower, including in any event all Indebtedness,
but specifically excluding Subordinated Debt.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Advances. Subject to and upon the terms and conditions of this
--------
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the lesser of the Committed Line or the Borrowing Base. For purposes
of this Agreement, "Borrowing Base" shall mean an amount equal to seventy-five
percent (75%) of Eligible Accounts. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time prior to the Revolving Maturity Date.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of Advances made under this Section 2.1 to Borrower's deposit
account. To evidence the Advances, Borrower shall deliver to Bank a promissory
note in substantially the form of Exhibit C-1.
-----------
The Revolving Facility shall terminate on the Revolving Maturity Date, at
which time all Advances under this Section 2.1 shall be immediately due and
payable.
<PAGE>
2.1.1 Equipment Advances.
------------------
(a) At any time from the date hereof through February 13, 1997
(the "Equipment Availability Date"), Borrower may from time to time request
advances (each an "Equipment Advance" and, collectively, the "Equipment
Advances") from Bank in an aggregate principal amount of up to Two Hundred Fifty
Thousand Dollars ($250,000). The Equipment Advances shall be used to purchase
Equipment approved from time to time by Bank and shall not exceed one hundred
percent (100%) of the cost of such Equipment, excluding installation expense,
freight discounts, warranty charges and taxes. Not more than One Hundred Fifty
Thousand Dollars ($150,000) of Equipment Advances may finance the licensing or
acquisition of software.
(b) Interest shall accrue from the date of each Equipment
Advance at the rate specified in Section 2.3(a), and shall be payable monthly on
the twelfth day of each month for each month through February 13, 1997. The
Equipment Advance or Equipment Advances that are outstanding on February 13,
1997 will be payable monthly on the twelfth day of each month in thirty-six (36)
equal installments of principal, plus accrued interest, beginning on March
12,1997, and continuing through the Maturity Date, when the entire principal
amount and all unpaid interest shall be due and payable.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1) Business
Day before the day on which the Equipment Advance is to be made. Such notice
shall be in substantially the form of Exhibit B. The notice shall be signed by a
---------
Responsible Officer and include a copy of the invoice for the Equipment
to be financed. To evidence the Equipment Advances, Borrower shall deliver to
Bank a promissory note in substantially the form of Exhibit C-2.
-----------
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement
is greater than the lesser of (i) the Committed Line or (ii) the Borrowing Base,
Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates Payments, and Calculations.
-----------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), any
-------------
Advances shall bear interest, on the average Daily Balance, at a rate equal to
one (1.0) percentage point above the Prime Rate, and any Equipment Advances
shall bear interest at a rate equal to one and one-half (1.5) percentage points
above the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from and
------------
after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on
--------
the twenty second calendar day of each month during the term hereof. Bank shall,
at its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Line, in which case those amounts shall thereafter accrue interest at the rate
then applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from
-----------
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
<PAGE>
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
------------------
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to Thirteen Thousand
------------
Seven Hundred Fifty Dollars ($13,750), which fee shall be due on the Closing
Date and shall be fully earned and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's customary
----------------------------------------
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses
-------------
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 Additional Costs. In case any change in any law, regulation,
----------------
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and
<PAGE>
when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. This Agreement shall become effective on the Closing Date
----
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank
---------------------------------------
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a collateral assignment and patent mortgage;
(d) financing statements (Forms UCC-1);
(e) subordination agreements of certain persons;
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due specified in
Section 25 hereof; and
(h) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
--------------------------
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt
<PAGE>
repayment of any and all Obligations and in order to secure prompt performance
by Borrower of each of its covenants and duties under the Loan Documents. Except
as set forth in the Schedule, such security interest constitutes a valid, first
priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall from
---------------------------------------------
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
----------------
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
----------------------------------
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
---------------------------
existing obligations. The property giving rise to such Eligible Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material respects
----------------------
of good and marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office. Except for "Hybrid Fax,
----------------------------------------
Inc.", Borrower has not done business under any name other than that specified
on the signature page hereof. The chief executive office of Borrower is located
at the address indicated in Section 10 hereof.
5.7 Litigation. There are no actions or proceedings pending by or
----------
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral. Borrower does not have knowledge of any such pending or threatened
actions or proceedings.
<PAGE>
5.8 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
-----
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock, partnership
------------
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary has obtained
-------------------
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 Full Disclosure. No representation, warranty or other statement
---------------
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
<PAGE>
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
-------------------------------------------
deliver to Bank (a) as soon as available, but in any event within thirty (30)
days after the end of each month, a company prepared consolidated balance sheet
and income statement covering Borrower's consolidated operations during such
period, certified by a Responsible Officer; (b) as soon as available, but in any
event within one hundred twenty (120) days after the end of Borrower's fiscal
year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days upon becoming available,
copies of all statements, reports and notices sent or made available generally
by Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand
Dollars ($100,000) or more; and (e) such budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time.
Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit D hereto, together with aged listings of
---------
accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit E hereto.
---------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense every six (6) months and at such times as Bank
deems appropriate after an Event of Default has occurred and is continuing.
6.4 Inventory, Returns. Borrower shall keep all Inventory in good
------------------
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
<PAGE>
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
-----
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
calendar month, a ratio of Quick Assets to Current Liabilities, excluding
deferred revenue, of at least 0.8 to 1.0.
6.9 Minimum Liquidity and Debt Service Coverage. Subject to the
-------------------------------------------
remainder of this Section, Borrower shall maintain, as of the last day of each
of Borrower's fiscal quarters, a minimum Liquidity of two (2) times the amount
of outstanding Equipment Advances. "Liquidity" means the sum of (i) cash and
cash-equivalents plus (ii) the Borrowing Base minus (iii) the aggregate
outstanding Advances as of the measurement date. Notwithstanding the foregoing,
from and after the time Borrower achieves a rolling 3-month Debt Service
Coverage for two consecutive fiscal quarters of at least 1.50 to 1.00, and for
so long as Borrower maintains as of the last day of each fiscal quarter
thereafter, a Debt Service Coverage of at least 1.50 to 1.00, Borrower shall not
be subject to the minimum required Liquidity set forth above. Debt Service
Coverage means, as measured quarterly as of the last day of each fiscal quarter
of Borrower, on a consolidated basis determined in accordance with GAAP, the
ratio of (a) an amount equal to the sum of (i) net income, plus (ii)
----
depreciation, amortization of intangible assets and other non-cash charges to
income to (b) an amount equal to the sum of all scheduled repayments for such
quarter (or month, as applicable) and mandatory prepayments of principal on
account of long-term debt.
6.10 Debt-Net Worth Ratio. Borrower shall maintain, as of the last
--------------------
day of each calendar month, a ratio of Total Liabilities, excluding deferred
revenue, less Subordinated Debt to Tangible Net
<PAGE>
Worth plus Subordinated Debt of not more than 2.0 to 1.0 through December 31,
1996, and not more than 1.5 to 1.0 thereafter.
6.11 Tangible Net Worth. Borrower shall maintain, as of the last day
------------------
of each calendar month, a Tangible Net Worth of not less than Three Million
Dollars ($3,000,000).
6.12 Profitability. Borrower may suffer a loss for the fiscal
-------------
quarter ending September 30, 1996, in an amount not to exceed Three Hundred
Thousand Dollars ($300,000). Borrower shall have a minimum net profit of One
Dollar ($1.00) for each fiscal quarter thereafter.
6.13 Registration of Intellectual Property Rights. Borrower shall
--------------------------------------------
register or cause to be registered (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on Exhibits A,
B and C to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by Borrower in connection with this Agreement within ninety
(90) days of the date of this Agreement. Borrower shall register or cause to be
registered with the United States Patent and Trademark Office or the United
States Copyright Office, as applicable, those additional intellectual property
rights developed or acquired by Borrower from time to time in connection with
any product prior to the sale or licensing of such product to any third party,
including without limitation revisions or additions to the intellectual property
rights listed on such Exhibits A, B and C. Borrower shall execute and deliver
such additional instruments and documents from time to time as Bank shall
reasonably request to perfect Bank's security interest in such additional
intellectual property rights.
6.14 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until payment in full of the outstanding Obligations or for so
long as Bank may have any commitment to make any Advances, Borrower will not do
any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
------------
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of its
------------------
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
-----------------------
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
<PAGE>
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
----------------------------
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof, at 100 Merchant Street, Cincinnati, Ohio, and at Borrower's office in
Portage, Michigan, and such other locations of which Borrower gives Bank prior
written notice and as to which Borrower signs and files a financing statement
where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
----------
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the principal of, or
---------------
any interest on, any Advances when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
----------------
under Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Loan Documents, or in any other present or future agreement
between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives notice thereof or
any
<PAGE>
officer of Borrower becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) day period or cannot
after diligent attempts by Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then Borrower
shall have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Advances will be required to be made during such
cure period);
8.3 Material Adverse Change. If there occurs a material adverse
-----------------------
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advances will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
----------------
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
<PAGE>
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, 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 all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, 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, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers,
<PAGE>
or employees) as Borrower's true and lawful attorney to: (a) send requests for
verification of Accounts or notify account debtors of Bank's security interest
in the Accounts; (b) endorse Borrower's name on any checks or other forms of
payment or security that may come into Bank's possession; (c) sign Borrower's
name on any invoice or bill of lading relating to any Account, drafts against
account debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to account debtors; (d) make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance; and
(e) settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 Accounts Collection. At any time from the date of this
-------------------
Agreement, Bank may notify any person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
-------------
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Facility as Bank deems necessary to protect Bank from the exposure
created by such failure; or (c) obtain and maintain insurance policies of the
type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies
-------------------------------
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, 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 Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
<PAGE>
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: JetFax, Inc.
1376 Willow Road
Menlo Park, CA 94025
Attn: Allen Jones
FAX: (415) 326-6003
If to Bank: Venture Lending
Three Palo Alto Square, Suite 150
Palo Alto, CA 94306
Attn: Craig Russell
FAX: (415) 843-6969
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-----------------
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this
<PAGE>
Agreement, or otherwise (including without limitation reasonable attorneys fees
and expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
----------------------------------
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
--------
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information Bank
---------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
JETFAX, INC.
By: ___________________________________
Title: ________________________________
VENTURE LENDING, a division of
Cupertino National Bank & Trust
By: ___________________________________
Title: ________________________________
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ________________________
FAX#: __________________ TIME: ________________________
_______________________________________________________________________________
FROM: ___________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: ___________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: ___________________________________________________
PHONE NUMBER: ___________________________________________________________
FROM ACCOUNT # ___________________ TO ACCOUNT # _____________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_________________________________
PRINCIPAL PAYMENT (ONLY) $_________________________________
INTEREST PAYMENT (ONLY) $_________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_________________________________
OTHER INSTRUCTIONS: _____________________________________________________
_________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
_____________________________________________________________________________
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_______________________________ ______________________________
Authorized Requester Phone #
_______________________________ ______________________________
Received By (Bank) Phone #
__________________________________________
Authorized Signature (Bank)
________________________________________________________________________________
<PAGE>
EXHIBIT C-1
REVOLVING PROMISSORY NOTE
$1,500,000 Palo Alto, California
Date: August 23, 1996
JETFAX, INC., ("Borrower'), for value received, hereby promises to pay to
the order of VENTURE LENDING, a division of Cupertino National Bank & Trust
("Bank"), in lawful money of the United States of America, pursuant to that
certain Loan and Security Agreement dated as of August 23, 1996, by and between
Borrower and Bank (the "Loan Agreement"), (i) the principal amount of $1,500,000
or, if lesser, (ii) the principal amount of all Advances outstanding as of the
maturity date hereof.
This Note is one of the Notes referred to in the Loan Agreement. All terms
defined in the Loan Agreement shall have the same definitions when used herein,
unless otherwise defined herein.
Borrower further promises to pay interest on each Advance hereunder in like
funds on the principal amount hereof from time to time outstanding from the date
hereof until paid in full, at a rate or rates per annum and payable on the dates
determined pursuant to the Loan Agreement.
Payment on this Note shall be applied in the manner set forth in the Loan
Agreement The Loan Agreement contains provisions for acceleration of the
maturity of Advances hereunder upon the occurrence of certain stated events and
also provides for optional and mandatory prepayments of principal hereof prior
to any stated maturity upon the terms and conditions therein specified.
All Advances made by Bank to Borrower pursuant to the Loan Agreement shall
be recorded by Bank on the books and records of Bank. The failure of Bank to
record any Advance or any prepayment or payment made on account of the principal
balance hereof shall not limit or otherwise affect the obligation of Borrower
under this Note and under the Loan Agreement to pay the principal, interest and
other amounts due and payable under the Advances.
Any principal or interest payments on this Note not paid when due, whether
at stated maturity, by acceleration or otherwise, shall bear interest at the
Default Rate.
Upon the occurrence of a default hereunder or an Event of Default under the
Loan Agreement, all unpaid principal, accrued interest and other amounts owing
hereunder shall, at the option of Bank, be immediately collectible by or on
behalf of Bank pursuant to the Loan Agreement and applicable law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorneys' fees, costs and
expenses. The right to plead any and all statutes of limitations as a defense to
any demand hereunder is hereby waived to the full extent permitted by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflict of laws principles
that would cause the application of the laws of any other jurisdiction.
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
JETFAX, INC.
By: ______________________________________
Printed Name: ____________________________
Title: ___________________________________
<PAGE>
EXHIBIT C-2
EQUIPMENT PROMISSORY NOTE
$250,000 Palo Alto, California
Date: August 23, 1996
JETFAX, INC., a Delaware corporation ("Borrower"), for value received,
hereby promises to pay to the order of VENTURE LENDING, a division of Cupertino
National Bank & Trust ("Bank"), in lawful money of the United States of America,
pursuant to that certain Loan and Security Agreement dated as of August 23,
1996, by and between Borrower and Bank (the "Loan Agreement"), (i) the principal
amount of $250,000 or, if lesser, (ii) the principal amount of all Advances
outstanding as of the maturity date hereof.
This Note is one of the Notes referred to in the Loan Agreement. All terms
defined in the Loan Agreement shall have the same definitions when used herein,
unless otherwise defined herein.
Borrower further promises to pay interest on each Advance hereunder in like
funds on the principal amount hereof from time to time outstanding from the date
hereof until paid in full, at a rate or rates per annum and payable on the dates
determined pursuant to the Loan Agreement.
Payment on this Note shall be applied in the manner set forth in the Loan
Agreement. The Loan Agreement contains provisions for acceleration of the
maturity of Advances hereunder upon the occurrence of certain stated events and
also provides for optional and mandatory prepayments of principal hereof prior
to any stated maturity upon the terms and conditions therein specified.
All Advances made by Bank to Borrower pursuant to the Loan Agreement shall
be recorded by Bank on the books and records of Bank. The failure of Bank to
record any Advance or any prepayment or payment made on account of the principal
balance hereof shall not limit or otherwise affect the obligation of Borrower
under this Note and under the Loan Agreement to pay the principal, interest and
other amounts due and payable under the Advances.
Any principal or interest payments on this Note not paid when due, whether
at stated maturity, by acceleration or otherwise, shall bear interest at the
Default Rate.
Upon the occurrence of a default hereunder or an Event of Default under the
Loan Agreement, all unpaid principal, accrued interest and other amounts owing
hereunder shall, at the option of Bank, be immediately collectible by or on
behalf of Bank pursuant to the Loan Agreement and applicable law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorneys' fees, costs and
expenses. The right to plead any and all statutes of limitations as a defense to
any demand hereunder is hereby waived to the full extent permitted by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflict of laws principles
that would cause the application of the laws of any other jurisdiction.
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
JETFAX, INC.
By: ______________________________________
Printed Name: ____________________________
Title: ___________________________________
<PAGE>
EXHIBIT D
BORROWING BASE CERTIFICATE
_______________________________________________________________________________
Borrower: JetFax, Inc. Lender: Venture Lending
Commitment Amount: $1,500,000
________________________________________________________________________________
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of _____ $_____________
2. Additions (please explain on reverse) $_____________
3. TOTAL ACCOUNTS RECEIVABLE $_____________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $_____________
5. Balance of 50% over 90 day accounts $_____________
6. Concentration Limits $_____________
7. Foreign Accounts $_____________
8. Governmental Accounts $_____________
9. Contra Accounts $_____________
10. Promotion or Demo Accounts $_____________
11. Intercompany /Employee Accounts $_____________
12. Other (please explain on reverse) $_____________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_____________
14. Eligible Accounts (#3 minus #13) $_____________
15. LOAN VALUE OF ACCOUNTS (75% of #14) $_____________
BALANCES
16. Maximum Loan Amount $_____________
17. Total Funds Available [Lesser of #15 or #16)] $_____________
18. Present balance owing on Line of Credit $_____________
19. Outstanding under Sublimits () $_____________
20. RESERVE POSITION (#17 minus #18 and #19) $_____________
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Venture lending.
COMMENTS: BANK USE ONLY
---- --- ----
Rec'd By:______________
Auth. Signer
JetFax, Inc.
Date: _________________
By: ___________________________ Verified:______________
Authorized Signer Auth. Signer
Date:__________________
_______________________
<PAGE>
EXHIBIT E
COMPLIANCE CERTIFICATE
TO: VENTURE LENDING
FROM: JETFAX, INC.
The undersigned authorized officer of JetFax, Inc. hereby certifies that in
accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ____________ with all required covenants except
as noted below and (ii) all representations and warranties of Borrower stated in
the Agreement are true and correct in all material respects as of the date
hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) PYE within 120 days Yes No
A/R & A/P Agings Monthly within 30 days Yes No
A/R Audit Initial and Semi-Annual Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on a Monthly Basis:
Minimum Quick Ratio 0.8:1.0 ____:1.0 Yes No
Minimum Tangible Net Worth $3,000,000 $_______ Yes No
Maximum Debt/Tangible Net
Worth 2:0:1.0/1.5:1.0 ____:1.0 Yes No
Minimum Liquidity 2.0:1.0 ____:1.0 Yes No
Minimum Debt Service 1.5:1.0 ____:1.0 Yes No
Profitability: Quarterly $1.00* $_______ Yes No
* 9/30/96 Loss is less than $300,000
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Received by: _______________
Sincerely, AUTHORIZED
_____________________________ SIGNER
SIGNATURE
Date________________________
Verified:___________________
AUTHORIZED
_____________________________
TITLE SIGNER
Date:_______________________
_____________________________ Compliance Status: Yes No
DATE
<PAGE>
JETFAX, INC.
WAIVER AND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This Waiver and Amendment ("Amendment") to Loan and Security Agreement
("Agreement") dated August 23, 1996, as amended September 18, 1996, is entered
into as of January 31, 1997, by and between VENTURE LENDING, a division of
Cupertino National Bank & Trust ("Bank") and JETFAX, INC. ("Borrower").
Borrower has requested certain modification(s) to the Agreement, and Bank
agrees to specified modification(s). This Amendment sets forth the modified
terms on which Bank will continue to advance credit to Borrower, and Borrower
will repay the amounts owing to Bank.
NOW, THEREFORE, the parties agree as follows:
WAIVER
------
Bank hereby acknowledges Borrower's breach of the Tangible Net Worth
(6.11) covenant of the section titled "Affirmative Covenants" for the period
ending November 30, 1996. Bank waives its remedial rights through November 30,
1996. Any further breach of this covenant is not waived.
Except as waived hereby, the Agreement, as the same may have previously
been waived, shall remain unaltered and in full force and effect. This Amendment
shall not be a waiver of any existing default or breach of a covenant unless
specified herein.
AMENDMENT
---------
The paragraph entitled Tangible Net Worth (6.11) is hereby deleted in its
entirety and replaced with the following:
6.11 Tangible Net Worth. Borrower shall maintain, as of the last day of
------------------
each calendar month, a Tangible Net Worth of not less than Two Million Five
Hundred Thousand Dollars ($2,500,000) commencing with calendar month end of
December 31, 1996.
CONDITIONS
----------
The effectiveness of the Amendment is conditioned upon signing Amendment.
Borrower signing below understands and agrees that in amending the
existing Agreement, Bank is relying upon Borrower's representation, warranties,
and agreements, as set forth in the existing Agreement. Except as expressly
modified pursuant to this Amendment, the terms of the existing Agreement remain
unchanged and in full force and effect. Bank's agreement to modifications to the
existing Agreement in no way shall obligate Bank to make any future
modifications to the Agreement. Nothing in the Amendment shall constitute a
satisfaction of the Obligation(s). It is the intention of Bank and Borrower to
retain as liable parties all makers and endorsers of Obligation(s), unless the
party is expressly released by Bank in writing. No maker, endorser, or guarantor
will be released by virtue of this Amendment. The terms of the Paragraph apply
not only to the Amendment, but also to all subsequent Amendments.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
JETFAX, INC. VENTURE LENDING, a division of
Cupertino National Bank and Trust
By: __________________________ By:_______________________________
Title:________________________ Title:____________________________
<PAGE>
AMENDMENT
---------
TO
--
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment to Loan and Security Agreement is entered into as of March
31, 1997, by and between Venture Lending, a division of Cupertino National Bank
& Trust ("Bank") and JetFax, Inc. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of August 23, 1996, as amended, (the "Agreement"). Borrower failed to
comply with certain financial covenants contained in the Agreement. Borrower has
asked Bank to waive compliance with those and certain other sections as of
certain dates and to amend certain provisions of the Agreement. Bank has agreed
to waive such compliance with those sections and certain other sections and to
amend the Agreement, all in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows;
1. Bank waives Borrower's obligation to comply with Sections 6.8, 6.12 and
6.13 of the Agreement from December 31, 1996 through June 30, 1997, and with
Section 6.9 from February 28, 1997 through May 31, 1997. Such waiver does not
constitute a waiver (i) of compliance with those sections as of any other date,
(ii) of any other failure by Borrower to comply with the Agreement or any other
Events of Default, now existing or hereafter arising, or (iii) Bank's right to
require compliance at all times with the other terms and conditions of the
Agreement. Bank reserves all rights under the agreement and under applicable
law.
2. The second clause of Section 7.1 is amended to read as follows:
(ii) Transfers of licenses and similar arrangements for the use of
the property of Borrower or its Subsidiaries.
3. Notwithstanding the provisions of Section 7.6, Borrower may pay
dividends to the holders of Series F Preferred Stock, and may redeem the Series
P Preferred Stock, and make payment of cumulative dividends thereon, in each
case in accordance with Borrower's Certificate of Incorporation and in
connection with the closing of Borrower's initial public offering of its common
stock in a sale (the "IPO") pursuant to a registration statement filed in
accordance with the Securities Act of 1933, as amended, in which Borrower
receives not less than $8,000,000 of proceeds.
4. Section 7.9 is amended to provide that, after the IPO, any payments
may be made on the Subordinated Debt provided that an Event of Default has not
occurred and is continuing prior to such payment, and would not exist after
giving effect to such payment.
5. Notwithstanding the provisions of Section 7.9 or any other Section of
the Agreement, Borrower may, from the proceeds of the IPO, repay up to $250,000
of Subordinated Debt owing to Crandell Group, Inc. and pay up to $1,000,000 to
Crandell Group, Inc. in lieu of certain payments on a royalty stream.
6. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
<PAGE>
7. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Agreement, and that no Event of Default has occurred and is continuing,
other than as disclosed to Bank.
8. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
9. As a condition to the effectiveness of this Amendment, Borrower shall
reimburse Bank for the Bank Expenses incurred in connection with this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
JETFAX, INC.
By: /s/ Allen E. Jones
------------------------------------
Title: VP & CFO
-----------------------------------
VENTURE LENDING
By: /s/ Dan Pistone
------------------------------------
Title: AVP
------------------------------------
<PAGE>
EXHIBIT 10.42
[* = CONFIDENTIAL TREATMENT REQUESTED]
AGREEMENT
This agreement ("Agreement") is entered into on 11-30, 1994, ("Effective Date")
by Intel Corporation ("INTEL"), having a place of business at 5200 NE Elam Young
Parkway, Hillsboro, OR 97124-6497 and Crandell Group, Inc. ("CGI"), having a
place of business at 125 East Victoria, Santa Barbara, CA 93101. INTEL and CGI
are individually referred to herein as a "Party" and collectively as the
"Parties."
RECITALS:
--------
CGI has developed or will develop certain software programs, related materials
and documentation hereinafter celled the "Products" and more explicitly defined
below.
INTEL desires to obtain from CGI a non exclusive license to use, market,
advertise, make or have made derivatives, copy and sublicense such Products.
CGI desires to give INTEL such a license and to support INTEL in its
application.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the foregoing Recitals and the covenants and
conditions set forth in this Agreement the Parties agree as follows:
1.0 DEFINITIONS
-----------
1.1 "Product(s)" means the software program(s), related materials and
documentation specified in Exhibit A. Products also includes any
Improvements made to the Product and accepted by INTEL hereunder.
1.2 "Error" means the error levels set forth in Section 6.0.
1.3 "Improvement(s)" means modifications, enhancements, upgrades and updates to
the Product supplied by CGI, which are related [*]described in Exhibit
A-1 but only those modifications, enhancements, upgrades and updates
which are supplied by CGI and accepted by Intel. CGI should provide
INTEL with the Improvements at least thirty (30) days prior to CGI
incorporating the Improvement in its products. Improvements do not
include derivatives of the Products or Improvements created by INTEL or
its sublicensees.
1.4 "NRE" means Non-Recurring Engineering.
1.5 "PCS" means Personal Conferencing Specification.
1
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
1.6 "Real Time Conferencing" means [*]
[*]
2.0 TERM
----
The initial term of this Agreement will begin on the Effective Date and
continue until June 1, 1997. This Agreement shall be automatically
extended at the end of the initial term for additional one (1) year
terms, unless terminated by either Party by giving written notice of
termination to the other Party within ninety (90) days prior to the end
of any term.
3.0 LICENSE GRANT
-------------
3.1 CGI grants to INTEL and its subsidiaries a non-exclusive, perpetual
royalty-free, worldwide license to the Product in source and object
code form, with the rights to incorporate, use, copy, reproduce,
modify, advertise, market, make or have made derivative works,
manufacture or have the Product manufactured, and distribute in
conjunction with an Intel conferencing/multimedia product .
3.2 CGI grants to INTEL and its subsidiaries a non exclusive, perpetual,
royalty-free, worldwide license to sublicense the Products in source
and object code form, only in combination with Real Time Conferencing
software developer kits directly or through its subsidiaries,
distributors and representatives. This license includes the right to
copy and distribute the Product documentation.
3.3 Products distributed by INTEL hereunder will be sublicensed to INTEL
sublicensees in accordance with INTEL's then current standard licensing
programs. INTEL's sublicensees may incorporate and use the source and
object code version of the Product only in conjunction with a PCS-
compliant Real Time Conferencing sublicensee product. Sublicensees may
not further sublicense the source code form of the Product. Sublicensees
may not further sublicense the object code of the Product except as
described above.
3.4 CGI also grants INTEL and its sublicensees a non-exclusive right to use
CGI's trademarks in association with the Product, provided that all
such trademarks shall be clearly identified. INTEL may also use its
name and trademarks in association with CGI's.
3.5 All copies of the Product made by INTEL and it sublicensees shall contain
CGI's or its vendors copyright notices.
2
<PAGE>
3.6 CGI's copyright notices and trademarks are listed in Exhibit C.
3.7 INTEL may distribute Improvements to its sublicensees, subsidiaries,
distributors, and representatives by any method (including electronic
bulletin board) provided such method contains a procedure insuring such
distribution of Improvements are made only to INTEL's sublicensees,
subsidiaries, distributors, and representatives properly licensed or
authorized in accordance with this Agreement.
3.8 INTEL acknowledges that CGI considers Product source code to be a trade
secret. INTEL shall not disclose or otherwise make Product source code
available in whole or in part, in any form, except with the same degree
of care and sublicensing restrictions which INTEL provides for its own
confidential end trade secret information.
4.0 PRODUCT
-------
CGI will develop and provide INTEL with the Product deliverables,
documentation, and materials as specified in Exhibit A.
5.0 ACCEPTANCE PROCEDURE
--------------------
5.1 INTEL shall have sixty (60) days after receipt of each Product in which to
accept or reject it. Rejection will be based on the Product's failure
to meet the specifications identified in Exhibit A.
5.2 During the acceptance period, INTEL will give CGI written notice of any
error in the Product. CGI will correct such errors within thirty (30)
days following receipt of notice. After CGI delivers a corrected Product
INTEL will have an additional sixty (60) days to accept or reject the
corrected Product. INTEL will notify CGI in writing of Product
acceptance.
5.3 If CGI fails to deliver an acceptable Product within one hundred twenty
(120) days after the delivery date specified in Exhibit A, INTEL may
terminate this Agreement in accordance with Paragraph 14.0,
Termination, and CGI will refund any fees paid hereunder.
6.0 MAINTENANCE, SUPPORT AND TRAINING
----------------------------------
6.1 CGI shall exercise its best efforts to maintain the Product at no cost to
INTEL for the term of this Agreement for all levels of Errors described
below, in accordance with the following procedure:
A. Level "1" Error
Critical; line down Error; basic service provided by the Product is
--------
interrupted, the Product is not usable for a major specified function.
CGI Response: Within two (2) business days from INTEL's written
notification to CGI and provided INTEL has provided CGI with the
necessary hardware, software and documentation
3
<PAGE>
necessary for CGI to reproduce the problem, CGI shall provide to Intel a
proposed plan to correct such Error. If a workaround cannot be found, an
update will be prepared on an emergency basis.
B. Level "2" Error:
Important; basic service provided by the Product is degraded; some
---------
functions may not be available or may be inadequate; convenient work
around does not exist.
CGI Response: Within ten (10) business days from INTEL's written
notification to CGI and provided INTEL has provided CGI with the
necessary hardware, software and documentation necessary for CGI to
reproduce the problem, CGI shall provide to Intel a proposed plan to
correct such Error. CGI shall provide a weekly status on its progress in
resolving the problem. If a workaround cannot be found within a
reasonable time, an update will be prepared on an emergency basis.
C. Level "3" Error:
Minor or annoying; functional problems cause inconvenience to users of
-----------------
the Product; workaround exists; the Product recovers on its own, but the
problem continues.
CGI Response: Within thirty (30) calendar days from INTEL's written
notification to CGI and provided INTEL has provided CGI with the
necessary hardware, software and documentation necessary for CGI to
reproduce the problem, CGI shall provide to Intel a proposed plan to
correct such Error. CGI shall provide a monthly status on its progress
in resolving the problem.
D. Level "4" Error:
Suggestion or Comment; No immediate response is necessary. Suggestions
---------------------
and comments can be incorporated in the next update if Intel and CGI
deem it appropriate. If Intel is unable to solve a sublicensee's
problem, CGI will assist Intel by telephone according to the above
priorities, with respect to the use and operation of the Product. Such
assistance will be available to Intel at no cost continuously during
CGI's regular business hours.
6.2 CGI agrees to provide INTEL with support for the Product for a minimum of
two (2) years ("Initial Support Period',) beginning June l, 1995. This
Initial Support Period may be renewed for additional one-year periods
upon agreement between the Parties. In the event of a material breach
of the Agreement by CGI, INTEL may terminate the any Support Period and
receive a refund prorated as of the effective date of the termination.
6.3 If CGI fails to honor its obligations under this Paragraph 6.0, INTEL may
withhold any payment due CGI under this Agreement until CGI provides
the required assistance.
4
<PAGE>
6.4 CGI will provide at least two (2) days of training to INTEL's technical
staff for the Product provided hereunder at INTEL's premises. Training
will cover the design, use and maintenance of the Product. Training
will be conducted at times mutually agreeable to INTEL and CGI and
Intel will reimburse CGI for reasonable travel and living expenses.
7.0 FEES
----
In consideration of the license granted and the support to be provided
hereunder, INTEL shall compensate CGI in accordance with the fees set
forth in Exhibit B.
8.0 TAXES
-----
All taxes based upon INTEL's use, sale, or possession of the Product,
other than income or franchise taxes due from CGI will be borne and paid
by INTEL.
9.0 WARRANTY
--------
9.1 CGI represents and warrants that it has good and merchantable title to
the Products and has the sufficient right, title and interest in the
Products to enter into and perform this Agreement and that it has not
done nor will it do any act or entered into any agreement which limits
or restricts performance of this Agreement.
9.2 CGI represents and warrants that the Product is CGI's original work and
CGI agrees to execute the Certificate of Originality set forth in
Exhibit D at the same time this Agreement is executed by CGI.
9.3 During the term of this Agreement, including any extensions hereof, CGI
represents and warrants that the Product will meet the specifications
set forth in Exhibit A. CGI will use its best efforts to correct any
defects or errors which materially affect the operation of the Product
in accordance with the obligations set forth in Paragraph 6, Maintenance
and Support.
9.4 ANY AND ALL OTHER EXPRESS OR IMPLED WARRANTIES INCLUDING WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY
EXCLUDED.
10.0 PATENT AND COPYRIGHT INDEMNIFICATION
------------------------------------
CGI will defend any suit or proceeding brought against INTEL, its
subsidiaries and its sublicensees based on a claim that the Product in
whole or in part infringe any patent, copyright, trade secrets, or
other intellectual property right, if notified of such claim in writing
and given authority, information and assistance (at CGI's expense) for
the defense of same. CGI will pay all damages and costs awarded therein
against INTEL, its subsidiaries and its sublicensees and all expenses
incurred by them, including attorney fees. If the Product or any
portions thereof are held in such suit to constitute infringement and
INTEL's use of the same is enjoined, CGI will at its own expense,
procure for INTEL, including its subsidiaries and its sublicensees the
right to continue using them, replace them with non-infringing products,
or modify them to become non-infringing.
5
<PAGE>
11.0 LIMITATION OF LIABILITY
-----------------------
NEITHER PARTY WILL BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS OR
LOSS OF USE, ARISING OUT OF ANY BREACH OR FAILURE UNDER THIS AGREEMENT.
12.0 NON-DISCLOSURE AND CONFIDENTIALITY
----------------------------------
12.1 The terms, conditions and obligations under which either Party may
from time to time disclose or receive Confidential Information are set
out in the Corporate Non-Disclosure Agreement ("CNDA") number 46163
executed between the Parties. The Parties may disclose Confidential
Information to each other pursuant to a duly executed Confidential
Information Transmittal Record form referencing such CNDA.
12.2 Neither Party may use the other Parties name in advertisements nor
otherwise disclose the existence or content of this Agreement without
the other Parties prior written consent.
13.0 EVALUATION AND MARKETING
------------------------
This Agreement does not preclude INTEL from evaluating or marketing
similar products nor will it be construed as an obligation on INTEL part
to market or distribute the Product.
14.0 TERMINATION
-----------
14.1 Either Party may terminate this Agreement if the other: (a) breaches any
material provision of this Agreement and fails to cure the same within
thirty (30) days after receipt of written notice from the other Party;
(b) files or has filed against it a petition in bankruptcy; (c) has a
receiver appointed to handle its assets or affairs; (d) makes or
attempts to make an assignment for benefit of creditors; or (e)
undergoes a change in control through acquisition, except as provided
under Paragraph 16.0, Assignment.
14.2 In the event of termination by INTEL under Paragraph 14.1, INTEL's
license to use the Products per Paragraph 3.0, License Grant, shall
continue in full force and effect. In the event of termination by CGI
under Paragraph 14.1, INTEL's license to use the Products per Paragraph
3.0, License Grant, shall immediately cease, except as provided under
Paragraph 14.5.
14.3 In the event the use of the Product developed hereunder is enjoined in
accordance with Paragraph 10.0, Patent and Copyright Indemnification,
INTEL may immediately cease all fee payments and may terminate this
Agreement without liability. However, in all situations CGI's
obligations contained in Paragraphs 10.0, Patent and Copyright
Indemnification, and 12.0, Non-Disclosure, shall survive termination
14.4 The rights and remedies provided in this Paragraph 14.0 are in addition
to any other rights and remedies provided at law or in equity.
6
<PAGE>
14.5 Termination of this Agreement by either Party for any reason will not
affect the right of any end user to use the Product under sublicense
granted in accordance with this Agreement.
15.0 FORCE MAJEURE
-------------
Neither Party will be liable for any failure to perform due to
unforeseen circumstances or causes beyond the Parties reasonable
control, including, but not limited to, acts of God, war, riot,
embargoes, acts of civil or military authorities, fire, flood, accident,
strikes, inability to secure transportation, facilities, fuel, energy,
or materials. Time for performance will be extended by the length of the
force majeure.
16.0 ASSIGNMENT
----------
INTEL may assign all or any part of its rights or obligations to INTEL
subsidiaries without CGI's consent. Otherwise, neither Party may assign
any rights hereunder without the prior written consent of the other,
which consent shall not be reasonably withheld. Any attempt to assign
any rights, duties or obligations hereunder will be void.
17.0 RELATIONSHIP OF PARTIES
-----------------------
Both Parties hereto are independent contractors. Neither Party will have
the authority to act for and or bind the other in any way, or to
represent that either is responsible for the acts of the other. Nothing
herein will be construed as forming a partnership or agency between the
Parties.
18.0 OWNERSHIP
---------
Title to the Product developed by CGI shall remain with CGI or its
vendors. Title to Intel-developed or Intel sublicensee-developed
derivatives shall be owned by INTEL or its sublicensees.
19.0 NOTICES AND REQUESTS
--------------------
All notices and requests required under this Agreement will be in
writing, will reference this Agreement and will be deemed given upon
delivery if personally delivered or upon receipt if sent by registered
or certified mail, postage prepaid, return receipt requested, to the
addresses listed below, which addresses may be modified upon subsequent
written notice.
Notices to INTEL will be sent to:
Intel Corporation
5200 NE Elam Young Pkwy.
Hillsborough, OR 97124-6497
Attn: Contract Management
M/S: HF3-24
7
<PAGE>
Notices to CGI will be sent to:
Michael Crandell
--------------------------------------------
Crandell Group, Inc.
-------------------------------------------
125 East Victoria St.
-------------------------------------------
Santa Barbara CA 93101
----------------------
20.0 GOVERNING LAW
-------------
The terms herein will be governed by the laws of the State of Oregon.
21.0 PERSONAL CONFERENCING WORK GROUP (PCWG(TM))
-------------------------------------------
Intel, a core member of the PCWG (an unincorporated association of
members of the personal computer and telecommunications industries), may
submit elements of the interface protocols of the Product as defined in
Exhibit A-1 to the PCWG for possible inclusion in the Personal
Conferencing Specification (PCS).
In the event any or all of the Product's interface protocol is accepted
by the PCWG, CGI agrees not to assert claims of patent, copyright, or
trade secret infringement against members of the PCWG or against PCS
licensees for use of the subject interface protocols. Any such covenants
not to assert claims of infringement shall not extend to associated
products not required to meet to PCS.
22.0 ISDN SERVICES
-------------
CGI will use commercially reasonable efforts to obtain ISDN service at
its offices by Q2 '95.
23.0 ENTIRE AGREEMENT
----------------
This Agreement, which includes, without limitation, the Recitals, and
its Exhibits constitutes the entire agreement between the Parties with
respect to the subject matter hereof, supersedes all prior and
contemporaneous agreements and negotiations, oral or written, express or
implied, and may only be modified in a writing signed by authorized
representatives of both Parties. No waiver of any breach hereof shall be
held to be a waiver of any other or subsequent breach.
24.0 ATTORNEY'S FEES
---------------
CGI shall be reimbursed for reasonable attorney's fees incurred in the
event of non-payment by INTEL for any undisputed amounts pursuant to
this Agreement.
8
<PAGE>
25.0 EXHIBITS
--------
The following Exhibits are included as part of this Agreement:
(a) Exhibit A - Product Deliverables, Documentation and Delivery Dates
(b) Exhibit A-1- Product Specifications
(c) Exhibit B - Fees
(d) Exhibit C - CGI's Copyrights and Trademarks
(e) Exhibit D - Certificate of Originality
Agreed and accepted:
INTEL CORPORATION CRANDELL GROUP INC.
By: /s/ Patrick P. Gelsinger By: /s/ Michael Crandell
-------------------------- -------------------------
PATRICK P. GELSINGER MICHAEL CRANDELL
-------------------------- -------------------------
Printed Name Printed Name
VP/GM PRESIDENT
-------------------------- -------------------------
Title Title
12/9/94 12/2/94
-------------------------- -------------------------
Date Date
9
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT A
Product Deliverables, Documentation and Delivery Dates
Product Deliverables:
- --------------------
[*]
Documentation:
- --------------
Delivery Dates:
- ----------------------------
[*] [*]
10
<PAGE>
EXHIBIT A-l
------------
Product Specifications
Attached in following pages 11-A through 11-K.
11
<PAGE>
CRANDELL GROUP, INC.
================================================================================
Crandell Group, Inc
125 East Victoria St
Santa Barbara, CA 93101
(805) 962-1 199
PROSHARE AND RICHIMAGE
INTEGRATION STRATEGY
Preliminary Specification
Revision 1.2
Michael Crandell
President
Bruce Wallace
Project Lead
CGI Inc.
October 13, 1994
RichImage(TM)
-----
11-A
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
ProShare and RichImage Integration Strategy
INTRODUCTION
[*]
RICHIMAGE PRINT CAPTURE
[*]
PRINT CAPTURE DRIVER IDENTIFICATION
- -----------------------------------
[*]
11-B
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
ProShare and RichImage Integration Strategy
PRINT JOB BEGINNING/ENDING CONTROL
- ----------------------------------
[*]
PRINT DATA TRANSFER
- -------------------
[*]
11-C
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
ProShare and RichImage Integration Strategy
[*]
11-D
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
ProShare and RichImage Integration Strategy
[*]
PRINT ERROR HANDLING
- --------------------
[*]
11-E
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
ProShare and RichImage Integration Strategy
[*]
RICHIMAGE DISPLAY LIBRARY
-----
[*]
11-F
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
ProShare and RichImage Integration Strategy
[*] Pages 11-G through 11-K are redacted.
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT B
---------
Fees
PRODUCT NRE:
- ------------
INTEL will pay CGI NRE fees in the amount of [*] for
integrating the Product with Intel's ProShare product.
Intel has already made payment to CGI
in the amount of [*] under purchase requisition number
417484 dated 9-20-94. The remaining [*] will be paid to
CGI within thirty (30) days from Intel's acceptance of [*] as set forth in
Exhibit A.
CGI may, to accelerate payment of the NRE, submit the [*] for INTEL acceptance
before the dates specified in Exhibit A.
PRODUCT SOURCE CODE FEE:
- ------------------------
INTEL will pay CGI a source code fee in the amount of [*]
within thirty (30) days from INTEL's signature of this Agreement.
SUPPORT FEES:
- -------------
INTEL will pay CGI [*] per year, payable
quarterly. These support fees will be paid in advance quarterly, beginning June
l, 1995.
<PAGE>
EXHIBIT C
---------
CGI'S Copyrights And Trademarks
CGI's copyright notices and trademarks are listed below:
Copyright notice:
- -----------------
(C)Crandell Group, Inc. 1993-94. All rights reserved.
Trademark:
- ----------
RichImage(TM)
-----
<PAGE>
EXHIBIT D
---------
CERTIFICATE OF ORIGINALITY
This questionnaire must be completed by the company official furnishing a
software material (program product or offering and related documentation, or
other software material) for INTEL.
One questionnaire can cover one complete product, even if that product includes
multiple modules. However, a separate questionnaire must be completed for the
code and another for its related documentation (if any).
Please leave no questions blank. Write "not applicable" or "N/A" if a question
is not relevant to the furnished software material.
******************************
1. Name of the software material (provide complete identification, including
version, release and modification numbers for programs and documentation).
RichImage(TM) portable document software V1.04 specified in Exhibit A-1.
------------------------------------------------------------------------
------------------------------------------------------------------------
2. Was the software material or any portion thereof written by any party
other than you, or your employees working within their job assignment?
Yes No [X]
--- ---
If Yes, provide the following information:
(a) Indicate if the whole software material or only a portion thereof
was written by such party, and identify such portion: N/A
-----------
------------------------------------------------------------------------
(b) Specify for each involved party:
(i) Name:
N/A
------------------------------------------------------------------
(ii) Company:
N/A
------------------------------------------------------------------
(iii) Address:
N/A
------------------------------------------------------------------
------------------------------------------------------------------
(iv) If the party is a company, how did it acquire title to the
software material (e.g., software material was written by
company's employees as part of their job assignment)?
N/A
------------------------------------------------------------------
------------------------------------------------------------------
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
(v) If the party is an individual, did s/he create the
software material while employed by or under contractual
relationship with another party?
Yes No N/A
--------- ---------
If Yes, provide name and address of the other party and
explain the nature of the obligations:
------------------
--------------------------------------------------------
--------------------------------------------------------
(c) How did you acquire title to the software material written by the
other party?
N/A
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
3. Was the software material or any portion thereof derived from any third
party's pre-existing material(s)?
Yes [X] No
--- ---
If Yes, provide the following information for each of the pre-existing
materials:
(a) Name of the materials: [*]
--------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
(b) Owner: [*]
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
(c) How did you get the right to use the pre-existing material(s)?
This is a widely available commercial library product which we
-------------------------------------------------------------------
licensed under [*] standard License. We are providing object/code
-------------------------------------------------------------------
only to Intel for this portion of the product.
-------------------------------------------------------------------
4. Identify below, or in an attachment, any other circumstances which might
affect Intel's ability to reproduce and market this software product,
including:
(a) Confidentiality or trade secrecy of pre-existing materials: N/A
-------
-------------------------------------------------------------------
-------------------------------------------------------------------
(b) Known or possible royalty obligations to other: N/A
------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
(c) Pre-existing materials developed for another party or customer
(including government) where you may not have retained full rights
to the material: N/A
--------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
<PAGE>
(d) Materials acquired from a person or company possibly not having title
to them: N/A
------------------------------------------------------------
-------------------------------------------------------------------
(e) Other circumstances:
----------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
CRANDELL GROUP, INC.
- ----------------------------------
CGI
by /s/ Michael Crandell
- ----------------------------------
Signature
MICHAEL CRANDELL
- ----------------------------------
Printed Name
PRESIDENT
- ----------------------------------
Title
12/2/94
- ----------------------------------
Date
12
<PAGE>
FIRST
AMENDMENT TO
AGREEMENT NO. 1 094SAW001
BETWEEN INTEL CORPORATION AND CRANDELL GROUP, INC.
EFFECTIVE NOVEMBER 30, 1994
This First Amendment ("First Amendment") to the Source Code License Agreement
between Intel Corporation ("Intel") and Crandell Group, Inc. ("CGI") dated
effective November 30, 1994
("Agreement") is hereby effective this 11th day of May , 1995
------- ----------
("Effective Date"), and modifies, amends and changes the Agreement as set forth
below.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which the
parties hereby acknowledge, the parties agree as follows:
1. Unless expressly set forth herein, all other terms and conditions in the
Agreement remain in full force and effect.
2. Unless expressly set forth herein, capitalized terms herein shall have
meanings given them in the Agreement.
3. Additions and changes to the Agreement are as follows:
3.1 The attached Exhibit A-2 is added to and made a part of this
Agreement.
4. The Agreement and this First Amendment are to be read together as one
document. If any terms in the Agreement conflict with any terms in this First
Amendment, the terms in this First Amendment shall govern regarding the subject
matter herein.
5. This First Amendment, which incorporates the Agreement constitutes the
entire Agreement between the Parties relating to the subject matter herein and
supersedes all prior and contemporaneous agreements, discussions, negotiations,
and understandings.
IN WITNESS WHEREOF, the Parties, by and through their respective
representatives, hereby execute this Agreement.
INTEL CORPORATION CRANDELL GROUP, INC.
By: /s/ Tony Baker /s/Patrick Gelsinger By: /s/ Michael Crandell
------------------------------------ -----------------------
Printed Name: Tony Baker Patrick Gelsinger Printed Name: MICHAEL CRANDELL
------------------------------- ----------------
Title: Director, CAE Vice President and Title: PRESIDENT
-------------------------------- -----------------------
and General Manager, Personal
Conferencing Division
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT A-2
-----------
Phase Two Product Specifications, Product Deliverables, Documentation, Delivery
Dates and Fees
Attached in the following pages 1-4.
Intel Deliverables:
- ------------------
[*]
The above source code may be used internally only to complete this Phase Two of
this Agreement.
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
CRANDELL GROUP
I N C O R P O R A T E D
FAX TRANSMISSION
----------------
FEBRUARY 10, 1995
TO: Bob Rossi, Intel
FR: Michael Crandell, CGI
RE: Project Quotes
Dear Bob:
Although I haven't heard from Imad yet, I expect that you need to move forward
in evaluating the quotes you asked me to give. So, in what follows, I have
made what I hope are reasonable assumptions about the scope of work based on the
overview that Imad gave me when we visited in January.
[*]
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
CRANDELL GROUP
I N C O R P O R A T E D
Estimated completion time: [*]
Fee for services: [*]
[*]
Estimated completion time: [*] (Some flexibility here depending on your
priority.)
Fee for services: [*]
Additional Work
- ---------------
We have also had some in-depth discussions here about the [*]
we discussed in our meeting with you. We are excited by this idea
technically, and are eager to implement this kind of functionality for ProShare.
I'd like to talk with you about some ideas we have of how that might be
organized and started.
Please give me a call to discuss things when you have time.
Best regards,
/s/Michael
Michael Crandell
President
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
CRANDELL GROUP
I N C O R P O R A T E D
FAX TRANSMISSION
----------------
FEBRUARY 22, 1995
TO: Bob Rossi, Intel
FR: Michael Crandell, CGI
RE: New Font Seg work
Dear Bob:
Here is the approach we would take to the [*] As
you will see, much of the work has been done already to reach the point of
explaining how the problem lies and what can be done to solve it.
[*]
[*]
We have identified two possible approaches to solving this problem, both of
which
would need to be tested and confirmed.
[*]
<PAGE>
[* = CONFIDENTIAL TREATMENT REQUESTED]
CRANDELL GROUP
I N C O R P O R A T E D
[*]
[*]
We might have some questions to ask of [*] during this process, and we'd like
to submit them through a contract on your side using your support agreement with
them.
I hope this is specific enough to let you evaluate our doing the rest of the
work.
Best regards,
/s/Michael
Michael Crandell
President
<PAGE>
SECOND
AMENDMENT
AGREEMENT NO. 1 094SAW001
BETWEEN INTEL CORPORATION AND JETFAX, INC. (CRANDELL GROUP, INC.)
EFFECTIVE NOVEMBER 30, 1994
This Second Amendment ("Second Amendment") to Agreement No. 094SAW001 between
Intel Corporation ("'lntel") and JetFax, Inc. ("JetFax") (previously known as
Crandell Group, Inc. or CGI) dated effective November 30, 1994 ("Agreement")
is hereby effective this 23rd day of December, 1996 ("Effective Date"), and
modifies, amends and changes the Agreement as set forth below.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which the
parties hereby acknowledge, the parties agree as follows:
1. Unless expressly set forth herein, all other terms and conditions in the
Agreement which incorporates the First Amendment thereto dated effective May 12,
1995 (collectively referred to as Agreement, as defined above), remain in full
force and effect.
2. Unless expressly set forth herein, capitalized terms herein shall have
meanings given them in the Agreement.
3. Additions and changes to the Agreement are as follows:
3.1 The attached Exhibit A-3 is added to and made a part of this Agreement.
4. The Agreement and this Second Amendment are to be read together as one
document. If any terms in the Agreement conflict with any terms in this Second
Amendment, the terms in this Second Amendment shall govern regarding the subject
matter herein.
5. This Second Amendment, which incorporates the Agreement constitutes the
entire Agreement between the Parties relating to the subject matter herein and
supersedes all prior and contemporaneous agreements, discussions, negotiations
and understandings.
IN WITNESS WHEREOF, the Parties, by and through their respective
representatives, hereby execute this Agreement.
INTEL CORPORATION JETFAX, INC.
By:/s/ Scott C. Darling By: /s/ Michael Crandell
----------------------------- ----------------------------
Printed Name: SCOTT C DARLING Printed Name: MICHAEL CRANDELL
------------------- -------------------
Title: AM-BCO Title: VP SOFTWARE
-------------------------- --------------------------
<PAGE>
[ * = CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT A-3
-----------
Product Specifications, Product Deliverables, Documentation, Delivery Dates and
Fees
Product Deliverables:
- --------------------
[*]
Documentation:
- -------------
RichImage Interface Specification, Final Version
Milestones:
- ----------
1. [*] - Delivery Date: [*]
-RichImage demo on [*] (stand-alone w/o Notebook).
- On-site visit to demo end deliver binaries.
Acceptance Criteria: [*]
<PAGE>
[ * = CONFIDENTIAL TREATMENT REQUESTED]
2. Notebook Integration [*] - Delivery Date: [*]
- Complete RichImage integration with Notebook. - Documentation update.
- On-site visit to integrate Notebook sources.
Acceptance Criteria:
[*]
3. QA/Beta Cycle
- 2 possible on-site visits for defect resolution.
4. [*] RichImage - Delivery Date: [*]
-RichImage demo on [*] (stand-alone w/o Notebook).
- On-site visit to demo and deliver binaries.
Acceptance Criteria: [*]
5. Notebook Integration [*] - Delivery Date: [*]
- Completed RichImage integration with Notebook. - Documentation update.
- On-site visit to integrate Notebook sources.
Acceptance Criteria:
[*]
<PAGE>
[ * = CONFIDENTIAL TREATMENT REQUESTED]
[*]
6. QA/Beta Cycle
-2 possible on-site visits for defect resolution.
Intel Deliverables:
- ------------------
ProShare(R) Notebook [*] binaries - Delivery Date: [*]
Payments:
- --------
Intel shall pay the following fees in exchange for the work performed hereunder:
1. Non-Recurring Engineering Payments:
Subject to Intel's acceptance of JetFax's work according to the
milestones set forth in this Exhibit A-3, Intel shall pay JetFax non-
recurring engineering fees as follows:
<TABLE>
<CAPTION>
Milestone Description Payment Amount
<S> <C>
Milestone No. 2 - [*] RichImage [*]
Milestone No. 5 - [*] RichImage [*]
- ---------------------------------------------------
</TABLE>
Travel expenses incurred by JetFax during the course of this work will be paid
by JetFax.
Maintenance, Support and Training:
- ---------------------------------
Maintenance and support during the QA/Beta cycle will be provided to Intel
pursuant to the terms of the Agreement.
<PAGE>
[JetFax logo]
ASSIGNMENT AND ASSUMPTION
Pursuant to the terms of an Asset Purchase Agreement effective upon the closing
date, (the "Asset Purchase Agreement") Crandell Group, Inc. ("CGI") is assigning
all of its rights and delegating all of its obligations under and to the
following agreement (the "Agreement") to JetFax, Inc. ("JetFax"): The Agreement
No. 1094SAW001 Between Intel Corporation (the "Company") and Crandell Group,
Inc. dated November 30, 1994.
The Company hereby consents to CGI's assignment and delegation of the Agreement
to JetFax.
JetFax hereby agrees, subject to and effective upon the closing under the Asset
Purchase Agreement, to assume all rights and obligations of CGI under the
Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Assignment and Assumption
to be executed by their duly authorized representatives as of ___________,
1996.
JETFAX CGI
JetFax, Inc. Crandell Group, Inc.
By:/s/ Allen K. Jones By:/s/ Michael Crandell 7/30/96
--------------------------------- ------------------------------
Allen K. Jones Michael Crandell
Chief Financial Officer 7/30/96 President
INTEL
Intel Corporation
By:/s/ Patrick P. Gelsinger 7/31/96
------------------------
<PAGE>
EXHIBIT 11.1
JETFAX, INC.
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS QUARTER
ENDED ENDED
DEC. 31, 1996 MARCH 31, 1997
------------- --------------
<S> <C> <C>
Weighted average shares outstanding:
Common Stock.................................... 982,025 1,001,673
Common Stock equivalents issued pursuant to SAB
83(1).......................................... 1,033,431 1,033,431
Convertible Preferred Stock (2)................. 6,293,978 6,293,978
Common Stock issuable upon conversion of
cumulative dividends on Series F Preferred
Stock.......................................... 144,623 144,623
---------- ----------
Common and common equivalent shares used in
computing pro forma loss per share............. 8,454,057 8,473,705
========== ==========
Net loss applicable to common stockholders:
Net loss........................................ $ (1,042) $ (636)
Less cumulative dividends on Series P Redeemable
Preferred Stock................................ 116 38
---------- ----------
Net loss applicable to common stockholders...... $ (1,158) $ (674)
========== ==========
Pro forma net loss per common and equivalent
share............................................ $ (0.14) $ (0.08)
========== ==========
</TABLE>
- --------
(1) Pursuant to Securities and Exchange Commission's Staff Accounting Bulletin
Number 83, all securities issued during the period from March 20, 1996
through the date of the initial filing of the Registration Statement
(March 21, 1997) are included in the calculation of common stock
equivalents as if outstanding for all periods prior to the initial public
offering, even if anti-dilutive. The common stock equivalents of options
and warrants are computed under the treasury stock method, using the
estimated initial public offering price of $9.00 per share and applicable
exercise prices.
(2) The convertible Preferred Stock converts to common stock upon the closing
of the initial public offering contemplated by this Registration
Statement. The pro forma net loss per share is computed as if the
conversion had occurred at the beginning of the period.
